The Federal Reserve
What is the Federal Reserve?? central bank of the US created in 1913 by an act of Congress & restructured after the Great Depression created to provide a safer, more flexible and more stable monetary & financial system
How is the Fed structured? overseen by 7-member Board of Governors 12 districts – 1 Federal Reserve bank per district
Member banks – all nationally chartered banks must join the Federal Reserve system -- contribute funds & receive stocks & dividends from the system -- Federal Reserve System is owned by banks, not government
What is the FOMC? Federal Open Market Committee -- Board of Governors of the Fed Reserve & 5 district bank presidents -- make key decisions about interest rates & the growth of the US money supply
ccheck clearing - process by which banks record whose account gives up $ and whose account receives $ -- mostly done electronically now
What is Monetary Policy? the actions taken by the federal reserve to regulate the economy 3 monetary policy tools: 1. Discount Rate 2. Required Reserve ratio 3. Open Market Operations
1. Discount Rate TThe interest rate that banks pay to borrow money from the Federal Reserve RReducing the discount rate – encourages people to borrow money -> increases money supply & helps economy grow **used during recession** - period of contraction
IIncreasing discount rate – discourages borrowing -> decreases money supply & slows economy down *** used during periods of inflation*** -- period of expansion & rising prices
2. Required Reserve Ratio t the fraction of deposits banks must keep on hand reducing the RRR – frees up money for loans -> puts more $ in circulation – helps economy grow increasing the RRR – keeps more $ out of circulation – slows economy down
3. Open Market Operations the buying and selling of government bonds with Federal Reserve Funds wwhen the Fed buys bonds, more money is put into circulation – helps the economy grow wwhen the Fed sells bonds, money is taken out of circulation – makes the economy slow down