The Federal Reserve

Federal Reserve Established Created by Federal Reserve Act, 1913 Purposes: To provide the country with an elastic currency Centralize bank reserves Provide multi-regional check / currency clearing system, to reflect country’s regions and growth Provide banking facilities for the federal government

Organization of the “Fed” Main components of the Federal Reserve Federal Reserve Board of Governors Seven Board Members Federal Reserve Banks 12 district banks Federal Open Market Committee (FOMC)

Board of Governors Seven Board members Appointed by President 14-year terms Term begins every two years Cannot be appointed again Supervises 12 Federal Reserve District banks Regulate activities of member banks

Federal Reserve Banks 12 regional reserve banks Responsibilities Each bank with own 9-member board of directors One person from each bank’s board selected for the Federal Advisory Board, meeting in Washington 4 times a year. Responsibilities Distribution of currency (paper and coin) Supervise Banks Dept. of Treasury functions

Federal Reserve Bank Districts

Monetary Policy Changing the rate of growth of the supply of money in circulation in order to affect the amount of cost and availability of credit. Supply of Currency goes down Dollar worth goes up Supply of Currency goes up Dollar worth goes down

Policies Three main tools to execute monetary policy Open market operations – the purchase and sale of government securities Reserve requirements – the required cash reserve a financial institution must keep at the Fed The discount rate – rate at which the Fed lends funds to banks

Functions of the FED Clearing Checks Fiscal agent to Federal Gov Supervising Member banks FDIC (not members of FED) Holding Reserves and Setting Requirements Supply of Paper Currency Coins are at 6 different mints throughout U.S. Regulate the Money Supply (Primary responsibility)

Other Fed roles Fight inflation Debt Discipline monetary growth and credit growth Through interest rates Monitor Gross Domestic Product (GDP) and Unemployment Debt Check Congressional spending/income Trade deficits Strength of dollar Fed is more flexible than Congress

Other Fed roles Check GDP growth If falling below 1% Ease reserve constraints Lower interest rates Counter rising unemployment If rising above 5% Strengthen reserve constraints Raise interest rates Monitor inflation Ideal: around 3% Fed policies remain the same