1. Slide 14-1 THE FEDERAL RESERVE

2. Slide 14-2 The Federal Reserve System –Established in 1913 by the Federal Reserve Act –The central bank of the United States

3. Slide 14-3 Banking Structures Throughout the World Central banks and their roles –Perform banking functions for their nations’ government –Provide financial services for private banks –Conduct their nations’ monetary policies

4. Slide 14-4 The Federal Reserve System Organization of the Fed –Board of Governors –12 Federal Reserve District Banks –Federal Open Market Committee (FOMC) –Banks

5. Slide 14-5 The Federal Reserve System Board of Governors (7) –Appointed by the president with Senate confirmation –Chair chosen by the President to a four-year permanent term Fed Chairman Alan Greenspan (1987-2006) Ben Bernanke (2006-present)

6. Slide 14-6 The Federal Reserve System Figure 14-7

7. Slide 14-7 Seventh District -- Chicago Head office at Chicago, Illinois. Branch Bank at Detroit, Michigan. Covers the state of Iowa; 68 counties of northern Indiana; 50 counties of northern Illinois; 68 counties of southern Michigan; and 46 counties of southern Wisconsin. Charles L Evans President, Federal Reserve Bank of Chicago The Federal Reserve System

8. Slide 14-8 The Chicago Fed Key Chicago Fed Statistics Number of employees - 1,500 Depository institutions in district - 2,990 Bank and bank holding companies supervised - 1,100 Checks processed - $1.7 trillion Currency received and counted - $53.2 billion Unfit currency destroyed - $6.5 billion New currency received per day from the Bureau of Engraving & Printing - $17.5 million Amount stored in its vaults - $7 billion to $10 billion Counterfeit notes found per day - 50 to 60

9. Slide 14-9 The Federal Reserve System The Federal Open Market Committee (FOMC) –Determines monetary policy –Composed of: The Board of Governors The president of the NY Fed bank The president of 4 of the remaining district banks, chosen on a rotating basis

10. Slide 14-10 The Federal Reserve System Functions of the Fed –Supplies the economy with currency –Holds depository institutions’ reserves –Acts as the government’s fiscal agent –Acts as the “lender of last resort” –Regulates the money supply – Monetary Policy –Intervenes in foreign currency markets

11. Slide 14-11 M1 –Currency Minted coins and paper currency not deposited in financial institutions –Checkable Deposits Any deposits in on which a check may be written –Traveler’s Checks How does The Fed Define Money?

12. Slide 14-12 M2 = M1 + Near Moneys Near Moneys –Assets that are almost money –Highly liquid (easily converted into money) LIQUIDITY – the amount by which an item can be used in exchange for another item –Ex: Dollar bills = high liquidity, Houses = lower liquidity, antique cars = lower liquidity Defining Money

13. Slide 14-13 Savings Deposits –Interest-earning funds that can be withdrawn at any time without payment of a penalty Time Deposit –A deposit in a financial institution that requires notice of intent to withdraw or must be left for an agreed period CDs (Certificates of Deposits for 6 mo-2 yrs) M2

14. Slide 14-14 Are credit cards money? –NO, they defer rather than complete transactions Are debit cards money? –YES, they instruct banks to transfer funds from checkable deposit accounts Defining Money

15. Slide 14-15 Monetary Policies Easy Money Policy –Money supply is allowed to grow –Interest rates are allowed to fall –Encourages Economic Growth Tight Money Policy –Money supply growth is restricted –Interest rates are driven up –Economic Growth is slowed

16. Slide 14-16 Ways in Which the Federal Reserve Changes the Money Supply Changes to the Reserve Requirement –Banks must keep a certain % in their vaults or at the Fed Open Market Operations –Buying and selling US Government securities (like US bonds) changes to the Discount Rate –The interest rate that the Fed charges for reserves it lends to member banks changes to the Federal Funds Rate –The interest rate that banks pay to borrow reserves from each other

17. Slide 14-17 Controlling the Economy Reserve Requirement –The amount of each checkable deposit banks MUST keep instead of lending out –Can be manipulated to expand or reduce the money supply (this is the least used method of manipulation)

18. Slide 14-18 Controlling the Economy Open Market Operations –The buying and selling of US Gov’t. securities in financial markets If the Fed purchases US Govt bonds, then the money supply goes up and interest rates go down And vice versa

19. Slide 14-19 Controlling the Economy Fed Funds Rate –Interest rate banks charge other banks to borrow money from each other higher rate = less money lent lower rate = more money lent

20. Slide 14-20 Controlling the Economy Discount Rate –Interest rate the Fed charges its member banks to borrow money from it Raising it intends to decrease inflation Lowering it encourages spending and borrowing

21. Slide 14-21 The End