The Federal Reserve Started in 1913 is response to yet another financial crisis Is Quasi-public Serves three purposes Regulates the payment system Supervises.

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Presentation transcript:

The Federal Reserve Started in 1913 is response to yet another financial crisis Is Quasi-public Serves three purposes Regulates the payment system Supervises banks Conducts monetary policy Washington D.C.

Federal Reserve Functions Issue currency Set reserve requirements Lend money to banks Collect checks Act as a fiscal agent for U.S. government Supervise banks Control the money supply LO4 14-3

12 REGIONAL FEDERAL RESERVE BANKS 25 BRANCH BANKS FOR THE 12 REGIONS FINANCIAL INSTITUTIONS Janet Yellen

LO3 The 12 Federal Reserve Banks 14-5

Monetary Policy and the Federal Reserve Monetary policy involves decisions the Fed makes to affect the nation’s money supply and credit. Goals *Full employment *Stable prices Federal Reserve Bank of Richmond

Think back to our inflation simulation where you bought candy. The Federal Reserve System doesn’t keep a stockpile of candy. The candy represents Treasury securities – US Govt. treasury bills and bonds. When the Federal Reserve buys or sells Treasury securities it is implementing monetary policy. **The process of buying and selling Treasury securities is called open market operations. This is done by the Federal Open Market Committee (FOMC)

Open Market Operations Contractionary Monetary Policy Selling securities to slow down the growth of the money supply and control inflation Expansionary Monetary Policy Buying securities to increase the money supply and encourage economic growth

How else does the Fed keep prices stable and maintain economic growth? Discount Rate – (Interest rates) The Fed does not “set” the interest rate that most people pay. It sets a discount rate that it charges to banks for short-term loans, which then contributes to the rate that the banks charge customers on their loans. – Lower interest rates = more banks making loans which creates money. – Higher interest rates = less loans, less money

How else does the Fed keep prices stable and maintain economic growth? Reserve Requirements Reserve requirements are the amount of funds that a depository institution (bank, credit union,…) must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.

Memorandum from the Chairman of the Board of Governors To: Federal Reserve Board of Governors Re: Current Economic Problems I have received the following economic data and would appreciate your recommendations for policy regarding monetary policy. Unemployment Rate Inflation Rate Last Year 6.2% 2.6% This Year 8.5% 2.5% Forecast for Next Year 9.6% 2.3% 1. Given the information in the table, what is the major economic problem confronting the U.S. economy? 2. Please summarize your suggested changes for monetary policy.