The Federal Reserve and Monetary Policy

The Federal Reserve System The Federal Reserve system has a high degree of political autonomy as the system is owned by the banks.

Federal Reserve Functions 1.Provides banking and fiscal services to the federal government. 2.Provides banking services to member and nonmember banks. 3.Regulates the banking industry. 4.Tracks and manages the national money supply to meet current demand and to stabilize the economy

Federal Reserve Functions 1.Sells, transfers, and redeems government bonds, bills, notes, and/or securities. 2.Issues paper currency. 3.Acts as a clearing center for “check clearing” which is the process of recording who gives up money and whose account receives the money when checks are written

Board of Governors 1.Seven members appointed to 14- year terms by the President. Members cannot be reappointed after serving a full term. 2.Among those seven members is selected a chair. The chair acts as the main spokesperson for the country’s monetary policy. 3.Monetary policy refers to the actions taken by the Federal Reserve to influence the level of real GDP (all the goods and services produced in the U.S.) and rate of inflation in the economy

Federal Reserve Banks 1.There are 12 Federal reserve districts 2.Monitors and reports on economic and banking conditions. 3.Each bank has a nine-member board of directors. 4.All nationally chartered banks are required to join the federal reserve system.

Federal Reserve Banks Advisory Council -main function is to provide feedback and advice to the Board of Governors concerning the financial health of each Federal Reserve District. Federal Open Market Committee - meet eight times a year to discuss the cost and availability of credit for businesses and consumers. Decisions can affect the financial markets, interest rates for home mortgages, and the growth of the money supply.

Federal Reserve Functions (Service Roles; 15.2) It checks on the activities of member banks by sending out bank examiners. They check on the lending and other financial activities of member banks. It protects consumers by enforcing truth- in-lending laws, which requires sellers to provide full and accurate information about loan terms.

Can I Have a Loan? In severe recessions, the Fed provides commercial banks emergency loans so they can maintain required reserves, known as the lender of last resort). The interest rate that banks charges each other to borrow money is called the federal funds rate. Whereas, the discount rate is the rate the Fed charges for loans to commercial banks.

Reserve Requirements 1.The Fed can buy or sell bonds to banks this can increase or decrease the money supply (called open market operations).

Regulating the Money Supply Demand for money is based on four factors: 1. cash needed on hand. 2. interest rates. 3. price levels in the economy. 4. general level of income. Too much money leads to inflation-too little money can cause a recession.

Monetary Control Controlling the supply of money in the economy (three tools). Means of controlling money supply: Open-market operations- Fed buys or sells government bonds from the public. Buying injects money into the economy/selling reduces money supply. Problems with controlling the money supply 1. Fed can’t control the amount households deposit. 2. Fed can’t control the amount bankers choose to loan.

Terms Reserves: Deposits to banks but not loaned out. Required Reserve Ratio: ratio of reserves to deposits required of banks by the Federal reserve.

Terms Excess reserves: reserves greater than the required amounts. This allows banks to meet customers demand for money. Prime rate: rate of interest banks charge on short-term loans to customers. Easy money policy: monetary policy that increases the money supply. Used to counter an economic contraction by lowering interest rates. Tight money policy: monetary policy that reduces the money supply. Used to counteract high inflation.