1. PowerPoint # 8: The Federal Reserve
Economics

2. The Federal Reserve System is the National Banking Network
4 major parts of the Federal Reserve System (the Fed)
Board of Governors—directs/makes policy
Appointed by the President, approved by the Senate
14 year term
Only one term allowed
Keep independent of politics
Set Reserve Requirements
Review Discount Rate

3. 4 Major Parts of the Fed Federal Open Market Committee (FOMC):
Sets Fed policy on purchase and sale of government securities (bonds)
Consists of the 7 members of the Board of Governors
Plus the presidents of 5 of the Federal Reserve Banks

4. 4 Major Parts of the Fed Federal Reserve Banks
12 National Banks that carry out the Fed’s policy
Sets the Discount Rate

5. 4 Major Parts of the Fed Member Banks
All national banks that carry out the Fed’s policy
Have the word “National” in their title
The Fed Diagram

6. 6 Functions of the Fed Holding reserve requirements
Regulating supply of Money
Clearing checks—transfers money from your account to another when you write a check

7. 6 Functions of the Fed Supplying economy with paper currency to:
Replace old worn out bills
Supply seasonal demand for cash
Not used as a tool to control the money supply

8. 6 Functions of the Fed
Acting as the fiscal agent for the federal government—holds the “checking account” for the Treasury
Supervising member banks

9. Reserve requirement is one tool used by the Fed to manipulate the $ supply
Reserve requirement: the % of deposits that a bank must keep in its vaults or on reserve with the Fed
The Fed regulates (determines the %) of the reserve requirement
To keep control over the nation’s money supply %

10. Reserve requirement is one tool used by the Fed to manipulate the $ supply
Changing the reserve ratio is the least often tool used by the Fed
It is the tool of last resort as a part of the Fed’s monetary policy
Monetary policy: the Federal Reserve’s decisions that affect the availability and cost of bank reserves, bank credit, and ultimately, money

11. Open Market Operations (OMO) is another tool used by the Fed to control $
OMO—the buying and selling of government securities (Treasury Bill, Treasury Notes, and Bonds)
When the Fed buys bonds from individuals it put $ into circulation
This increases, loosens, expands the money supply

12. Open Market Operations (OMO) is another tool used by the Fed to control $
When the Fed sells bonds, it takes $ out of circulation
This decreases, tightens, contracts the money supply
OMO is the most flexible and most often used tool of the Fed to manipulate the money supply

13. The Discount Rate is another tool used by the Fed to control $
The discount rate is the interest rate the Fed charges depository institutions (banks, savings and loans…) for loans
If the Fed raises the discount rate, it is increasing the cost of borrowing
Banks will be less likely to borrow
Their reserves will not increase
They’ll have less $ available for loans
This decreases the money supply

14. The Discount Rate is another tool used by the Fed to control $
If the Fed decreases the discount rate, then it is decreasing the cost of borrowing $
Banks will be more likely to borrow
This will raise bank reserves
Banks will have more money available to loan out
This increases the money supply
This is usually the first tool used by the Fed