Chapter 16: The Federal Reserve and Monetary Policy

Where does money come from? Theoretically, one paper dollar can become millions in the form of bank deposits. The Federal Reserve System is intended to slow this cycle down.

The Federal Reserve Bank -is privately owned by member banks but has a great deal of public oversight by the Federal gov’t. Its primary goal is to regulate the money supply to encourage healthy economic growth. It also is responsible for printing money and buying and selling Fed. Gov’t securities as a method of controlling the money supply.

The Federal Reserve System Lo Lo The Board of Governors overseas the system. It has 7 members serving 14 year staggered terms. They are appointed by the president and confirmed by the Senate. The Chairman is also selected in the same manner and serves a 4 year term after which they can be reappointed. ‎Janet L. Yellen is the new Chairwoman. 2 seats are currently vacant and awaiting appointments.

Many people said this man had more influence over the economy than the president.

The 12 Federal Reserve Banks and their districts

Responsibilities of Each Federal Reserve Bank Check clearing- overseas the electronic transfer of money Supervising Lending-enforces “truth in lending” laws and makes sure member banks have adequate reserves of cash. If a member bank does not have enough reserves, they can barrow from the federal reserve bank in their district. The FOMC, which is made up of the members of the Board of Governors, sets the Discount Rate.

Member Banks Over 4000 banks are part of the Federal Reserve System. Each is required to purchase stock in the Federal Reserve Bank, for which they receive a dividend. Any bank where you see an FDIC (Federal Deposit Insurance Corporation) sign is part of the system.

3 methods used by the Fed to control the money supply Reserve Requirements- actual paper money that banks must keep in their vaults to cover potential customer withdrawals. Setting the Discount Rate- Interest charged to member banks by the Fed to maintain reserve requirements. Open Market Operations- buying and selling of U.S. securities (treasury bills, bonds, and notes) to alter the supply of money.

Reserve Requirements By increasing reserve requirements, the Fed reduces amount that banks can lend, thus reducing the supply of money. By decreasing reserves, the Fed increases the ability of banks to lend, thus increasing the money supply. Since 2000, banks must hold 3% of deposits in cash up to $41 million, and 10% over that. Reserve requirements are rarely used because they have such a drastic impact on $ supply.

The Discount Rate By increasing the discount rate, banks are encouraged to maintain higher amounts of reserves so they will not need to barrow from the Fed. The discount rate also affects interest rates throughout the economy. A higher discount rate will increase rates on all other loans, discouraging consumers from barrowing. The Fed generally changes the discount rate quarterly, but often changes it very little.

Open Market Operations The most common practice used by the FOMC to regulate the money supply. When the FOMC purchases treasury securities, new money is printed and given to the seller, who will then likely deposit the money in a bank, increasing reserves and the ability of the bank to lend. When the FOMC sells treasury securities, the Fed can take the money out of circulation. This reduces bank reserves, thus constricting the $ supply.

Contractionary Monetary Policy Increasing reserve requirements Increasing the discount rate Selling treasury securities

Expansionary Monetary Policy Decreasing reserve requirements Decreasing the discount rate Buying treasury securities

arypolicy/fomcpresconf htm What does Janet Yellen say about the current state of unemployment in the U.S.? What does she say about inflation? What kind of policy (Expansionary or Contractionary) does the FOMC have?

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