PowerPoint # 8: The Federal Reserve

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) 1. 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 • Sets Reserve Requirements • Reviews Discount Rate

3. 4 Major Parts of the Fed • 2. Federal Open Market Committee (FOMC): • Consists of the 7 members of the Board of Governors • Plus the presidents of 5 of the Federal Reserve Banks • Sets Fed policy on purchase and sale of government securities (bonds)

4. 4 Major Parts of the Fed • 3. Federal Reserve Banks • 12 National Banks that carry out the Fed’s policy • Each bank with 9 directors that appoint the President of the Federal Reserve Bank • Sets the Discount Rate

5. 4 Major Parts of the Fed • 4. 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 • 1. Holding reserve requirements • 2. Regulating supply of Money • 3. Clearing checks—transfers money from your account to another when you write a check

7. 6 Functions of the Fed • 4. 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 • 5. Acting as the fiscal agent for the federal government—holds the “checking account” for the Treasury • 6. Supervising member banks

9. Which function is not necessary?

10. Tools of the Fed Monetary policy: the Federal Reserve’s decisions that affect the availability and cost of bank reserves, bank credit, and ultimately, money. They increase or decrease money supply.

11. 1. Reserve Requirement • The Fed regulates (determines the %) of the reserve requirement keep control over the nation’s money 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 %

12. Reserve Requirement • If the Fed raises the reserve requirement, it is requiring the banks to save more of the depositor’s money, decreasing their excess reserves. • Banks will have less $ available for loans • This decreases the money supply

13. Reserve Requirement • If the Fed lowers the reserve requirement, it is requiring the banks to save less of the depositor’s money, increasing their excess reserves. • Banks will have more $ available for loans • This increases the money supply

14. 2. Open Market Operations (OMO) • 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

15. Open Market Operations (OMO) • 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

16. 3. The Discount Rate • 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

17. The Discount Rate • 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

18. Questions • What is the Fed doing if they decrease the reserve requirement? • What is the Fed doing if they increase the discount rate? • What is the most expansionary form of monetary policy? List all the tools and how they would be used.