1. Warm UP 1.Explain Recession and Depression. 2.What caused the Great Depression

2. The Fed and Monetary Policy

3. The Federal Reserve System The “Fed” or Federal Reserve System is the central bank of the United States. What does The Fed do?: 1.Provides financial services to government 2.Regulates financial institutions 3.Maintains payment systems 4.Enforces consumer protection laws 5.Conduct Monetary policy

4. Structure of the Fed Ownership - one of the unique features of the Fed is that it is privately owned by its member banks or banks that are members of and hold stock in the Fed. Individual banks may or may not belong to the Fed but National banks must belong. Some state banks belong. Private individuals can own shares indirectly in the Fed by owning shares in member banks

5. Structure of the Federal Reserve System

6. Board of Governors ●7 member Board of Governors. ●Each member is appointed by the president and approved by the Senate to serve a 14 year term of office. ●Appointments are staggered so that 1 becomes vacant every 2 years. ●Supervises and regulates the Fed ●Informs nation on important monetary matters

7. Federal Open Market Committee (FOMC) ●Makes decisions about money supply and interest rates ●Made up of the 7 members from the Board of Governors, the New York district fed, and 4 other district Federal Reserve bank presidents. ●Committee meets 8 times a year in D.C. to review country’s economy and to make decisions about the cost and availability of credit

8. Federal Advisory Council ●Consists of Representatives from each of the 12 district banks. ●Provides advice to the Fed on overall health of the economy. ●Consumer advisory council - advise of consumer credit laws ●Thrift Institutions Advisory Council - reps from credit unions and saving and loan institutions.

9. 12 District Banks ●Serve commercial banks in their region. ●Each bank is supervised by Fed in DC Member Banks ●Banks that are members of Fed

10. Responsibilities of Fed 1.Monitoring the reserves of its state chartered member banks. 2.Has legislative authority over bank holding companies - corporations that own one or more banks. 3.Supervise and regulate foreign banks that control about 20% of all banking assets in the U.S. 4.Power to terminate domestic operations of foreign banks.

11. Responsibilities of Fed 5.Authorizes and supervises international operations of U.S. member banks 6.Approves mergers of 2 or more banks in which one is a member bank.

12. Monetary Policy Expansion or contraction of money supply to influence cost and availability of credit Fractional Reserve System - requires banks and other depository institutions to keep a fraction of their deposits in the form of legal reserves. Reserve Requirement - rule stating that a % of every deposit be set aside as legal reserves

13. Excess Reserves - legal reserves in excess of the reserve requirement. Currently around 12% Excess reserves are loaned out to other customers. * Size of money supply determined by reserve requirement and reserves in system

14. Tools of Monetary Policy 1.Changes to Reserve Requirement - A decrease in requirement allows more to loan out and a increase would allow less. 2.Open Market Operations - The buying and selling of government securities in financial markets. This can increase or decrease the money supply. 3.Changes to discount rate - Fed changes interest rates on loans to banks therefore effecting interest rates to consumers.

15. Real rate of inflation: market rate of interest minus rate of inflation If Interest rate = 12% and inflation rate = 4%, then real rate of interest is 8% V. Definitions of money supply: 1. M1 = 2. M2 =

16. 3. For political reasons, Fed is often pressured to keep interest rates low, even at expense of future inflation. Low interest rates stimulate the economy: Easy Money Policy >> Money Supply Grows >> Interest Rates Fall >> Buy on Credit This policy encourages people to buy more goods on credit and businesses to increase production as well as borrow to invest in new plant & equipment