1. The Federal Reserve

2. 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

3. 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)

4. 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

5. 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

6. Federal Reserve Bank Districts

7. 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

8. 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

9. 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)

10. 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

11. 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