1. The Federal Reserve System “the Fed”
Reference Chapter 10

2. 12 Federal Reserve Districts
Commercial banks’ banker
Federal Reserve System is comprised of 12 districts, each with a president.
very much like a “branch office”
Commercial banks join the federal reserve system.
are strengthened by it
can network with other banks more effectively
increase consumer confidence

3. Board of Governors

5. Board of Governors 7 members appointed by president approved by Senate
14 yr. term
chairman
Janet Yellen
formerly
Alan Greenspan
Ben Bernanke

6. 6 Major Jobs of the Fed Supply the economy with paper money and coins.
Hold bank reserves.
Provide check-clearing services
Supervise member banks
Serve as lender of last resort.
Control the money supply

7. 1.Supply the economy with paper money and coins.
“U.S. Mint”
Bureau of Engraving and Printing

9. 2. Hold bank reserves
reserves at the Fed + vault cash =total reserves

10. 3.Provide check-clearing services
Facilitates check-cashing between commercial banks.
for example, Wells-Fargo and Bank of America

11. Between banks, cities EXAMPLE:
Pete pays Sue for a used car. He gives her a check for $2,000.
Sue deposits the check in her bank and is credited with $2,000 in her account.
Sue’s bank sends the check to FRB who increases the bank’s reserve account by $2,000.
FRB decreases Pete’s bank’s reserve by $2,000
FRB notifies Pete’s bank to reduce Pete’s account by $2,000.

12. 4. Supervise member banks 5. Serve as lender of last resort
Fed may “audit” a bank
check that the loans it made are good
be sure it has followed banking rules
verify the accuracy of its accounting.
Fed can lend funds to struggling banks.
Glass-Steagall Act (1933) establishes FDIC
Fed of Minneapolis flies to the rescue. page 291 in text

13. 6. Control the money supply. I kept the most important for last!
Tools for changing the money supply
Reserve Requirement
Discount Rate
Open Market Operations
Why is changing the money supply important?
TO CONTROL INFLATION and/or UNEMPLOYMENT
Monetary Policy
Stop here and do money supply kinetic

14. Prepare Section Review Answers
1. Federal Open Market committee: major decision maker in the FRB.
2. Federal Reserve System : US Central Bank
3. Board of Governor’s : controls and coordinates fed activities (7 members)
4. Reserve account: funds required to be held in the FRB

15. Review Describe the structure of the Federal Reserve System.
7 member Board of Governors
appointed by president, ratified by Senate
14 year term, chairman
12 districts
In what year was it founded?
1913

16. Review 6 major jobs? Supply the economy with paper money and coins.
Hold bank reserves.
Provide check-clearing services
Supervise member banks
Serve as lender of last resort.
Control the money supply

17. Review Why would a bank choose to join the Federal Reserve System?
FRB helps maintain bank stability
Consumers want their accounts to be covered by FDIC

18. Review Describe the check-clearing process.
Pete pays Sue for a used car. He gives her a check for $2,000.
Sue deposits the check in her bank and is credited with $2,000 in her account.
Sue’s bank sends the check to FRB who increases the bank’s reserve account by $2,000.
FRB decreases Pete’s bank’s reserve by $2,000
FRB notifies Pete’s bank to reduce Pete’s account by $2,000.

19. The Money Creation Process

20. “Fed” Tools for Changing the Money Supply

21. These tools are used to implement
MONETARY
POLICY
These goals are prescribed in a 1977 amendment
to the Federal Reserve Act. From website SF FRB
Monetary policy has two basic goals:
to promote "maximum" sustainable output and employment
to promote "stable" prices

22. Why would the Fed want to change the money supply?
Slow INFLATION
(too much money chasing too few goods)
Lower UNEMPLOYMENT
(too many people out of work)
Promote Growth in the Economy
Slow down an “over-heated” economy
Adjusting for the normal business cycle

23. Typical Business Cycle

24. Long Term Growth

26. Monetary Policy
Fed is responsible for maintaining price stability and employment
“Expansionary Monetary Policy”
goal is to increase money supply
to reduce unemployment
to avoid deflation
“Contractionary Monetary Policy”
goal is to decrease the money supply
to reduce inflation
To prevent “bubbles”

27. 3 Important Tools Changing the Reserve Requirement
Changing the Discount Rate
Conducting “Open Market Operations”
The three tools are interactive

28. 1. Reserve Requirement currently: 3-10%
Raise the reserve requirement = Less money in circulation
slows the economy
eventually brings price stability (lowers inflation)
Lower the reserve requirement = More money in circulation
More money to buy goods and services
requiring more jobs to produce them
(lowers unemployment)

29. 2. Changing the discount rate
discount rate = interest rate on fed to bank loans (set by Fed)
federal funds rate = interest rate on bank to bank loans (set by fed funds market)
Raising the interest rate influences how much banks will decide to borrow from the fed (who will lend them money “out of thin air”, increasing money supply)
Keeping the discount rate low encourages borrowing

30. The Fed can encourage borrowing by keeping rates low
federal funds rate=interest rate on bank to bank loans discount rate=interest rate on fed to bank loans
Another bank
When the federal funds rate is lower than the discount rate, who would you borrow from?
When the discount rate is lower than the federal funds rate, who would you borrow from?
The Fed can encourage borrowing by keeping rates low
The fed

31. currently: discount rate - .75% federal funds rate - 0-.25%
What is the Fed trying to do?
Lower: The Fed wants the banks to borrow money from the Fed in order to increase the amount of money in circulation
increase the amount of the bank’s reserves, freeing more of the bank’s money for loans.
Higher: The Fed wants banks to borrow from each other which keeps the supply of money the same.

32. Federal Open Market Committee (FOMC)1
controls Open Market Operations
Open Market Purchases buys government securities = increases money supply
Open Market Sales sells government securities = reduces the money supply
7 board of governors + 5 district presidents

33. Important Background Information
U.S. Department of the Treasury
the agency of government responsible for paying for government and its actions
collects taxes
borrows money if needed
It borrows from the public by offering securities
securities: promises to repay with interest at some future time

34. Open Market Purchases Fed offers to buy your government security.
“Thin air” money is given to you.
Money supply increases

35. Open Market Sales Fed offers to sell government securities it holds.
You pay for it.
Your money “disappears” into the Fed
Decreases the money supply.

36. Review Reserve Requirement Discount Rate Open Market Operations
What are three ways the Fed can control the money supply?
Reserve Requirement
Discount Rate
Open Market Operations

37. Review Why does the Fed want to control the money supply?
Monetary Policy:
maintain employment
control inflation

38. Review What is the “reserve requirement”? What is the discount rate?
If the Fed wants to reduce the money supply, what does it do to the reserve requirement?
What is the discount rate?
What is the federal funds rate?
If the Fed wants to increase the money supply, what does it do to the discount rate?

39. Review
What is the difference between an Open Market Sale and an Open Market Purchase?
action?
goal?