1. 1 Chapter 5 The Overseer: The Federal Reserve System © 2000 South-Western College Publishing

2. 2 Federal Reserve System The central bank of the United States that regulates the banking system and determines monetary policy and that was created in 1913

3. 3 The Federal Reserve Act The 1913 Congressional act that created the Federal Reserve System

4. 4 Lender of Last Resort The responsibility of the Fed to provide an elastic currency by lending to commercial banks during emergencies and thus providing banks with the necessary funds to avoid insolvency

5. 5 The Banking Reform Acts of 1933 & 1935 Acts passed by Congress in response to the collapse of the banking system between 1930 and 1933 which put in place many banking reforms designed to insure the safety and soundness of the system; also broadened the power of the Fed

6. 6 Board of Governors Seven governors of the Fed appointed by the President with Senate approval for 14-year terms

7. 7 Reserve Bank One of 12 Federal Reserve Banks located in a large city in its district

8. 8 Federal Reserve Banks Boston New York Philadelphia Richmond Cleveland Atlanta Chicago Dallas Kansas City St. Louis Minneapolis San Francisco

9. 9 The largest Federal Reserve Banks New York Chicago San Francisco

10. 10 The Fed Open Market Committee (FOMC) The principal policy-making body within the Federal Reserve System, composed of the seven members of the Board of Governors and five Reserve Bank presidents

11. 11 Policy Directive Statement of the FOMC that states its policy consensus and sets forth operating instructions regarding monetary policy

12. 12 Monetary Policy The attempts by the Fed to stabilize the economy and to ensure sufficient money and credit for an expanding economy

13. 13 Board of Governors - Seven members appointed by the president of the United States and confirmed by the Senate for 14 year terms - One of the seven governors is appointed chairperson by the president of the United States and confirmed by the Senate for a 4 year term - The Board of Governors appoints three of the nine directors to each Federal Reserve Bank Board of Governors - Seven members appointed by the president of the United States and confirmed by the Senate for 14 year terms - One of the seven governors is appointed chairperson by the president of the United States and confirmed by the Senate for a 4 year term - The Board of Governors appoints three of the nine directors to each Federal Reserve Bank Exhibit 5.2

14. 14 Twelve Federal Reserve Banks Each with nine directors who appoint the Reserve Bank president and other officers of the Reserve Banks Twelve Federal Reserve Banks Each with nine directors who appoint the Reserve Bank president and other officers of the Reserve Banks Exhibit 5-2

15. 15 Federal Open Market Committee (FOMC) Seven members of the Board of Governors plus the president of the New York Fed and presidents of four other Reserve Banks Federal Open Market Committee (FOMC) Seven members of the Board of Governors plus the president of the New York Fed and presidents of four other Reserve Banks Exhibit 5.2

16. 16 Nearly 5,000 Member Commercial Banks Elect six of the nine directors to each Reserve Bank Nearly 5,000 Member Commercial Banks Elect six of the nine directors to each Reserve Bank Exhibit 5.2

17. 17 Actions taken to improve the health of the economy Actions taken to insure the safety and soundness of the financial system Actions taken to insure the safe and efficient transfer of funds Maintains the Treasury’s transaction s account Formulates Monetary Policy Supervises and Regulates the Financial System Facilitates the Payments Mechanism Acts as Fiscal Agent for the U.S. Government FUNCTION S OF THE FED Exhibit 5.3

18. 18 Payments Mechanism The ways in which funds are transferred to make payments

19. 19 Mary’s bank Dad receives and deposits check Mary writes a check to Dad Dad’s bank Federal Reserve bank Exhibit 5.4 Check Check canceled Check deposited Check forwarded

20. 20 Open Market Operations The buying and selling of government securities by the Fed to change the reserves of depository institutions

21. 21 Discount Rate The rate depository institutions are charged to borrow reserves from the Fed

22. 22 Required Reserves The amount of reserve assets that the Fed requires depository institutions to hold against outstanding checkable deposit liabilities

23. 23 Required Reserve Ratio The fraction of deposit liabilities that must be held as reserve assets

24. 24 Board of Governors (7 appointed members) - Sets reserve requirements and approves discount rates as a part of monetary policy - Supervises and regulates member banks and bank holding companies - Establishes and administers protective regulations in consumer finance - Oversees Federal Reserve Banks Exhibit 5.5

25. 25 Twelve Federal Reserve Banks (Reserve Banks -12 Districts) - Propose discount rates - Lend funds to depository institutions (discount policy) - Furnish currency - Collect and clear checks and transfer funds for depository institutions - Handle U.S. government debt and cash balances Exhibit 5.5

26. 26 Federal Open Market Committee (FOMC) (Board of Governors plus 5 Federal Reserve Bank presidents) Directs open market operations (buying and selling of U.S. government securities), which are the primary instrument of monetary policy Exhibit 5.5

27. 27 Freedom of Information Act A 1966 law that requires more openness in government and more public access to government documents

28. 28 Proposed Reforms Change in status of Reserve Bank presidents on the FOMC Broadening of authority of GAO Mandated disclosure of monetary policies and discussions