The Federal Reserve

What is the Fed?  Central bank of the United States  Established in 1913  Purpose is to ensure a stable economy for the nation

Roles & Responsibilities  Conduct the nation’s monetary policy  Supervise and regulate banking institutions  Operate a nationwide payments system

Federal Reserve System Structure  Board of Governors  Federal Open Market Committee  12 Reserve Banks

Board of Governors  Seven members Appointed by the president Confirmed by the Senate Serve staggered 14-year terms

Where is my Fed?

Fractional Reserve Banks are required to keep a fraction of their deposits Legal reserve- Coins/currency in the vault Reserve Requirement- % of each deposit set Aside as legal reserve

Federal Reserve Banks  Operate a nationwide payments system  Distribute the nation’s currency and coin  Supervise and regulate member banks and bank holding companies  Serve as banker for the U.S. Treasury  Contribute to monetary policymaking through Bank presidents’ participation in the Federal Open Markets Committee.

Financial Services  Supply currency and coin to banking institutions  Clear more than one-third of nation’s checks  Transfer funds electronically ( Automated Clearing House (ACH), Fedwire -- payment transaction not subjected to any waiting period)  Serve as bank for the U.S. Treasury

Monetary Policy  Policy changes affect the nation’s supply of money and credit.  Actions have real short- and long-term effects on the economy.

Goals of Monetary Policy Stable Prices Sustainable Economic Growth Full Employment

Federal Reserve’s Monetary Policy How the Federal Reserve implements monetary policy: Reserve Requirement Discount Rate Open Market Operations

Reserve Requirement Reserve requirements are the amount of funds that a bank establishment is obligated to retain against deposit liabilities. The Board of Governors has exclusive authority over changes in reserve requirements. Financial organizations must hold reserves in the form of cash in a vault or deposits with Federal Reserve Banks. Less than $12.4 million have no minimum reserve requirement Between $12.4 million and $79.5 million must have a liquidity ratio of 3% Exceeding $79.5 million must have a liquidity ratio of 10% Current Reserve Requirements as of January 23, 2014

The discount rate is the interest ratio charged to national banks and other financial institutions on loans they receive from their district Federal Reserve Bank's lending facility. The Federal Reserve Banks offer three discount window plans to financial organizations: primary, secondary, and periodic credit. Discount Rate Each has its own interest rate and the loans are fully secured.

“Easy Money” - low interest rate (lots of money in circulation) “Tight money policy”—restrict growth of money supply –interest rate rises

Effects of Low Interest Rates  Generally, low interest rates stimulate the economy because there is more money available to lend. Consumers buy cars and houses. Businesses expand, buy equipment, etc.  Why does the Fed lower interest rates? If inflation is in check, lower rates stimulate economic activity, thus boosting economic growth.

Effects of High Interest Rates  The Fed raises interest rates as an effective way to fight inflation. Inflation—a sustained rise in the general price level; that is, all prices are rising together.  Consumers pay more to borrow money, dampening spending.  Businesses have difficulty borrowing; unemployment rises.

Recent Chairperson of the Fed

Questions/answers?  What are the three main roles of the Federal Reserve System?  Where is your Fed?  What four Financial Services are provided by The Fed?  What are the goals of monetary policy?  What happens when the Fed lowers interest rates? Raises interest rates?  What is inflation? Why should it concern you?

U.S. hourly wage growth moderates in November 8:30 a.m. Dec. 4, 2015 WASHINGTON (MarketWatch) - Average hourly wages paid to American workers rose 0.2% in November, a bit slower compared to the prior month. The typical worker earned $25.25 an hour, up 4 cents from October. From November 2014 to November 2015, hourly wages rose 2.3%, falling from a 2.5% pace in October that raised hopes of rising wages in the months ahead. Annualized increases in pay had stuck to 2.2% or less through most of the recovery until the bump in October. Still, economists expect the creation of millions of new jobs and a falling unemployment rate to put more upward pressure on wages in the near future. The amount of time people worked each week fell a notch to 34.5 hours.

AMARILLO, TX - Consumers may start paying more in interest rates as early as next Wednesday. 1. The Federal Reserve will increase interest rates next week for the first time in almost a decade. 2. Now that the nation has recovered from the 2008 recession, the government has chosen now to start slowly bringing interest rates back up. 3. The first increase will be small, according to Richard Ware, the president of Amarillo National Bank. 4. He estimates about a quarter of a point increase. How would this affect consumers?

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