Federal Open Market Committee (FOMC) 12 Person Committee 7 are the members of the Board of Governors 5 are heads of the District Banks They make most policy (or rules and regulations) about the economy
So what does the Fed do? 1. Control the money supply How much cash is made available 2. Supply the economy with paper money (Reserve Notes) 3. Hold Bank Reserves Glen Rock Savings Bank must keep a reserve account at its District Reserve Bank 4. Provide check-clearing services 5. Supervise member banks Make sure they’re following the rules 6. Serve as the lender of last resort If Glen Rock Savings loses all of it’s money and can’t borrow from another local bank the Fed will lend it money
Creating Money (not just PRINTING IT) Bank C keeps $81 in Reserve; lends out $730 to Max Max buys new Surf Board from ClaireClaire deposits money into Bank D Bank B keeps $90 in Reserve; lends out $810 to Cindy Cindy buys new couch from AlanAlan deposits money into Bank C Federal Reserve issues $1,000 to Bank A Bank A gives $900 loan to Tim to buy TV Tim buys TV from Jeff; Jeff brings money to Bank B From $1,000 banks have created over $3,600 in loans and reserves!!
3 “buttons” to push Changing the Reserve Requirement How much do banks HAVE to keep in their reserve? The less they have to keep in reserve the more they have to lend out The more money people will borrow and spend Open Market Operations Government buys/sells Securities (bonds; or IOU’s for future payments) Money can appear/disappear out of thin air! Changing the Discount Rate How much interest the Fed will charge on loans to banks
Open Market Sales The Fed wants to take money out of the economy to reduce spending They will SELL securities; you buy it for $10,000 and write a check Fed then takes that $10,000 check; deposits into their account and ERASES the $10K from existence. Less money is now in the market
Look up Quantitative Easing. What kind of Fed policy is this?