1. 1 The Federal Reserve and Monetary Policy SECTION 1: The Federal Reserve System SECTION 2: The Federal Reserve at Work SECTION 3: Monetary Policy Strategies CHAPTER 14

2. 2 Objectives: How did the Panic of 1907 affect U.S. banking? What are the purposes and characteristics of the Federal Reserve System? How is the Fed organized? The Federal Reserve System SECTION 1

3. 3 Effects of the Panic of 1907 on U.S. banking: caused the collapse of many banks endangered the monetary system broke the resistance to central banking The Federal Reserve System SECTION 1

4. 4 The Fed Roles: to supervise member banks to hold cash reserves to control circulation of money Features: lacks a single central bank is owned and controlled by the member banks makes membership optional for some banks The Federal Reserve System SECTION 1

5. 5 Structure of the Fed National level: Board of Governors—highest policy-making body Federal Open Market Committee—made up of the Board of Governors, the Federal Reserve Bank of New York, and four other district bank members District level: 12 Federal Reserve banks 25 branch offices local member banks The Federal Reserve System SECTION 1

6. 6 Federal Reserve Districts San Francisco Kansas City Minneapolis Chicago. Boston Richmond Atlanta St. Louis *Alaska and Hawaii are under the jurisdiction of the Federal Reserve Bank of San Francisco Dallas New York PhiladelphiaCleveland Washington DC

7. 7 Federal Reserve Structure Chief policymaking body of the Federal Reserve System Open market operations Provides services Financial institutions Federal government Board of Governors of the Federal Reserve System 1 Chairman 1 Vice-Chairman 5 Directors Regional Reserve Banks and Branches 12 regional Federal Reserve banks 25 branches of Federal Reserve banks Oversees Federal Open Market Committee 7 members of the Board of Governors 5 Federal Reserve bank presidents

8. 8 Objectives: What services does the Fed provide to banks? How does the Fed serve the federal government? How do economists measure the U.S. money supply? The Federal Reserve at Work SECTION 2

9. 9 Services the Fed provides to banks: clearing checks lending reserves to banks The Federal Reserve at Work SECTION 2

10. 10 Services the Fed provides to the government: serves as the government’s bank supervises the Fed’s member banks regulates the national money supply The Federal Reserve at Work SECTION 2

11. 11 How economists measure the U.S. money supply: M1—counts all currency in circulation, the value of all traveler’s checks, all checking account deposits, and deposits in all similar accounts in banks M2—money counted in M1, plus money in money market accounts, money market mutual fund shares, and other savings deposits M3—money counted in M2, plus all large time deposits, repurchase agreements, and some Eurodollars The Federal Reserve at Work SECTION 2

12. 12 Objectives: Why does the Fed rely on either an easy- money or a tight-money policy? How does the Fed make monetary policy? What are the challenges associated with determining monetary policy? Monetary Policy Strategies SECTION 3

13. 13 Money policy Easy-money policy: to expand the money supply to increase aggregate demand to create jobs Tight-money policy: to slow business activity to help stabilize prices to restrict money supply to reduce aggregate demand Monetary Policy Strategies SECTION 3

14. 14 How the Fed makes monetary policy: open-market operations—buying and selling of government securities discount rate—the interest rate that the Fed charges member banks for use of its reserves and which the Fed adjusts to encourage or discourage borrowing reserve requirement—money that banks must hold in their vaults or accounts to meet demand requests Monetary Policy Strategies SECTION 3

15. 15 Challenges associated with determining monetary policy: incorrect economic forecasts time lags in enacting monetary policy difficulties in establishing priorities and trade-offs lack of coordination among government agencies Monetary Policy Strategies SECTION 3

16. 16 1. 1.How does the organization of the Federal Reserve System avoid placing too much power in a single bank? 2. 2.Why is the Fed considered a “lender of last resort”? 3. 3.How does the Fed put monetary policy to work? What are the characteristics of easy-money and tight-money policies? 4. 4.What are the main difficulties the Federal Reserve encounters when developing monetary policy? 5. 5.What tools does the Fed use to implement monetary policy? Wrap-Up CHAPTER 14