The Federal Reserve and Monetary Policy

The Federal Reserve System, also known as "The Fed," is the central bank of the United States. In its role as a central bank, the Fed is a bank for other banks and a bank for the federal government. It was created to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

The Federal Reserve System is a network of twelve Federal Reserve Banks and a number of branches under the general oversight of the Board of Governors. The Reserve Banks are the operating arms of the central bank.

Congress created the Federal Reserve System on December 23, 1913, with the signing of the Federal Reserve Act by President Woodrow Wilson. The Federal Reserve System includes the Board of Governors and the twelve regional Reserve Banks.

What are some of the main responsibilities of the Federal Reserve System? Conducting the nation’s monetary policy to help maintain employment, keep prices stable, and keep interest rates relatively low Supervising and regulating banking institutions to make sure they are safe places for people to keep their money and to protect consumers’ credit rights.

Providing financial services to depository institutions, the U. S Providing financial services to depository institutions, the U.S. government, and foreign central banks, including playing a major role in clearing checks, processing electronic payments, and distributing coin and paper money to the nation's banks, credit unions, savings and loan associations, and savings banks.

What are interest rates and why are they important? Interest rates are the prices that people pay to borrow money or are paid to lend money. Interest rates, like other prices, are determined by the forces of supply and demand. Higher interest rates provide incentives for people to save more and borrow less.

When lower interest rates provide incentives for people to borrow more and save less. When interest rates rise, businesses are likely to invest less in capital and households are likely to spend less on housing, cars, and other major purchases.

Lower interest rates are likely to cause businesses to invest more in capital and households to buy more big ticket items. In this way, interest rates affect the level of economic activity in the economy. The Federal Reserve System is able to affect the level of interest rates through its monetary policy.

US Federal Reserve Banks and Districts

FEDERAL RESERVE BANKS 1 - Boston - A 2 – New York - B 3 - Philadelphia - C 4 - Cleveland - D 5 - Richmond - E 6 - Atlanta - F 7 - Chicago - G 8 - St. Louis - H 9 - Minneapolis - I 10 - Kansas City - J 11 - Dallas - K 12 - San Francisco - L

Services to the Gov’t: 1. Serves as the Government’s BANK 2. Supervises the Fed’s MEMBER banks 3. Regulates the MONEY SUPPLY

The Fed regulates the money supply so that it can replace worn currency, but also to control the supply of money in our nation for economic reasons.

Which person has more influence over the U.S. economy? Barack Obama Janet Yellen Nathan Deal Alan Greenspan BJ Mathis

Janet Yellen

Janet Yellen is the Chairman of the Federal Reserve. She supervises the Fed and tells them what to do.

Monetary Policy The plan to EXPAND or CONTRACT the money supply in order to INFLUENCE the cost and availability of CREDIT.

After the Fed measures the money supply in the U. S After the Fed measures the money supply in the U.S., it decides to use either EASY-MONEY POLICY or TIGHT-MONEY POLICY to correct certain areas in our economy.

Easy-Money Policy Lower interest rates INCREASES the money supply and creates jobs lowers UNEMPLOYMENT and promotes economic growth.

Tight-Money Policy Raises interest rates (makes money TIGHT) DECREASES the money supply and slows business activity to help stabilize PRICES

3 Ways the Fed can control the money supply: 1. DISCOUNT RATE 2. OPEN MARKET OPERATIONS 3. RESERVE REQUIREMENT

Discount Rate The INTEREST rate the Fed charges its MEMBER banks for the use of its RESERVES.

The “prime rate” (minimum interest rate that banks charge on LOANS to customers) usually rises and falls as the discount rate rises and falls.

Lowering the discount rate encourages BORROWING. Borrowing encourages SPENDING. Encourages economic GROWTH.

Open Market Operations Open Market Operations (the MAIN tool of the Fed) is the buying and selling of government SECURITIES.

What it does To contract the money supply, the Fed will SELL securities to people. Because people are “getting rid” of their money at that time, the money supply will SHRINK.

To expand the money supply, the Fed will BUY securities back from people and businesses. That puts more money back into the HANDS of consumers and expands the money supply.

Reserve Requirement The money that MUST BE HELD by banks (either in their own vaults or in their ACCOUNTS at the district Federal Bank).

A HIGH reserve requirement (like 15%) requires that banks must keep that money and NOT loan it out.

A LOW reserve requirement (2.5%) allows banks to loan out MORE money.

Lowering the reserve requirement encourages BORROWING. Borrowing encourages SPENDING. Encourages economic GROWTH.

While the Fed does use the reserve requirement tool to influence the economy, the Fed does not make frequent or dramatic changes in the reserve requirement.

That would cause INSTABILITY in the banking system That would cause INSTABILITY in the banking system. The percentage does change annually according to a FORMULA specified in the Monetary Control Act of 1980.