1. Federal Reserve Banks
Bell Ringer: How do banks create money? Explain the basic process.

2. Federal Reserve Banks
How it works and what it does.

3. Introduction
The fed’s control over the supply of money is the key mechanism of monetary policy.
MONETARY POLICY IS THE USE OF MONEY AND CREDIT CONTROLS TO INFLUENCE MACROECONOMIC ACTIVITY.

4. Introduction
Congressional spending can also effect the economy
FISCAL POLICY: USING GOVERNMENT SPENDING TO INFLUENCE MACROECONOMIC ACTIVITY.
Example: Gov’t spends more money on roads and bridges, more money goes into the economy.

5. The Fed monitors banking in every part
of the United States.
E. Napp

6. Federal Reserve Banks CLEARS CHECKS BETWEEN BANKS HOLDS BANK RESERVES.
The Federal Reserve performs the following services:
CLEARS CHECKS BETWEEN BANKS
HOLDS BANK RESERVES.
PROVIDES CURRENCY TO THE PUBLIC.
PROVIDES LOANS TO PRIVATE BANKS.
FEDERAL GOVERNMENTS BANKS
Deposit taxes; pays Gov’t bills

7. The Board of Governors
The Fed is controlled by a seven person Board of Governors.
Each governor is appointed to a 14-year term by the President (with confirmation by the U.S. Senate).

8. The Board of Governors
The long term is intended to give the Fed a strong measure of political independence.
THE PRESIDENT SELECTS ONE OF THE GOVERNORS TO SERVE AS CHAIRMAN FOR A 4-YEAR TERM.
Currently: Jerome Powell

9. Structure of the Federal Reserve System
Private banks
(depository institutions)
Federal Reserve banks
(12 banks, 24 branches)
Board of
Governors
(7 members)
Federal Open Market Committee (12 members)
Federal Advisory Council and other committees

10. Monetary Tools
The Federal Reserve controls the money supply using the following three policy instruments:
RESERVE REQUIREMENTS
Change loan requirements
DISCOUNT RATES
Makes it cheaper or more expensive to loan money
OPEN-MARKET OPERATIONS
Adds to takes away money

11. Reserve Requirements
The Fed requires banks to keep a minimum amount of required reserves.
People deposit money
Banks loan money:
REQUIRED RESERVES – THE MINIMUM AMOUNT OF RESERVES A BANK IS REQUIRED TO HOLD;

12. Discounting
Discounting refers to the Federal Reserve lending of reserves to private banks.
A bank can deal with a reserve shortage by going to the Fed’s “discount window” to borrow reserves directly.
BY RAISING OR LOWERING THE DISCOUNT RATE, THE FED CHANGES THE COST OF MONEY FOR BANKS AND THE INCENTIVE TO BORROW RESERVES.

13. The Discount Rate Excess reserves earn no interest.
Banks have a tremendous profit incentive to keep their reserves as close to their required reserve level as possible.

14. The Federal Funds Market
The federal funds market is where a bank that finds itself short of reserves can turn to other banks for help.
THE FEDERAL FUNDS RATE IS THE INTEREST RATE FOR INTER-BANK RESERVE LOANS.
Reserves borrowed in this manner are called “federal funds” and are lent for short periods - usually overnight.

15. Sale of Securities
A bank that is low on reserves can also sell securities.
Banks use some of their excess reserves to purchase government bonds.

16. Open-Market Operations
Open-market operations are the principal mechanism for directly altering the reserves of the banking system.

17. Hold Money or Bonds
The Fed’s open-market operation focus on the portfolio choices people make.
The Fed attempts to influence the choice by making bonds more or less attractive, as circumstances warrant.

18. Hold Money or Bonds Bond sales by the Fed reduce the flow.
When the Fed buys bonds from the public, it increases the flow of deposits (reserves) to the banking system.
Bond sales by the Fed reduce the flow.
Likewise, when the Fed sells bonds, it removes money from the banking system.

19. Open Market Operations
The Fed
The Public
Banks
Buyers spend account balances
Fed SELLS bonds
Open market operations
Reserves decrease
Sellers deposit bond proceeds
Reserves increase
Fed BUYS bonds