The Federal Reserve and The Federal Reserve and Monetary PolicyMonetary Policy

The The Federal Reserve Bank Federal Reserve Bank serves as the CENTRAL serves as the CENTRAL bank for the United States. bank for the United States.

The Federal Reserve Bank The Federal Reserve Bank is commonly called “is commonly called “the the FedFed.”.”

The FedThe Fed11. . SUPERVISESSUPERVISES member member banksbanks

22. . HOLDSHOLDS cash reserves cash reserves33. . MOVESMOVES money into money into or out of or out of CIRCULATIONCIRCULATION..

Each region has it’s own FedEach region has it’s own FedThis is so the national Fed This is so the national Fed doesn’t have too much doesn’t have too much powerpower

There are 12 Feds (dollar There are 12 Feds (dollar bills have the number of the bills have the number of the Fed they came from on it)Fed they came from on it)

Fed ServicesFed ServicesCheck Clearing (40 Check Clearing (40 Billion Checks are Billion Checks are cleared each year)cleared each year)

How it works:How it works:11. I write a check . I write a check for $100 to Mega for $100 to Mega Sports Supply in Sports Supply in Austin, TX.Austin, TX.

22. Mega Sports . Mega Sports deposits the check deposits the check into their bank into their bank account at the Texas account at the Texas National Bank.National Bank.

33. Texas National adds . Texas National adds $100 to Mega Sports’ $100 to Mega Sports’ account and sends my account and sends my check to the Fed check to the Fed district bank in district bank in DALLAS.DALLAS.

44. The Dallas district bank . The Dallas district bank transfers $100 to THE transfers $100 to THE TEXAS NATIONAL BANK TEXAS NATIONAL BANK reserve account, and reserve account, and sends the check to the sends the check to the Atlanta Fed. Reserve Bank.Atlanta Fed. Reserve Bank.

55. The ATL Fed. Reserve . The ATL Fed. Reserve Bank receives the check Bank receives the check and transfers $100 to the and transfers $100 to the DALLAS Federal Reserve DALLAS Federal Reserve Bank, and then sends the Bank, and then sends the CHECK to my bank, First CHECK to my bank, First Union.Union.

66. My bank receives . My bank receives the check and the check and transfers $100 from transfers $100 from my account back to my account back to the Federal Reserve the Federal Reserve Bank in ATLANTA.Bank in ATLANTA.

Services to the Services to the Gov’t:Gov’t:

11. . ServesServes as the as the Government’s BANKGovernment’s BANK

22. . SupervisesSupervises the Fed’s the Fed’s MEMBERMEMBER banks banks

33. . RegulatesRegulates the the MONEY MONEY SUPPLYSUPPLY

The Fed regulates the The Fed regulates the money supply so that it money supply so that it can can replace worn currencyreplace worn currency, , but also to but also to control the control the supply of moneysupply of money in our in our nation for economic nation for economic reasons.reasons.

Types of Money:Types of Money:M1M1=CURRENCY, =CURRENCY, TRAVELER’S CHECKS, TRAVELER’S CHECKS, and DEMAND depositsand DEMAND deposits

Which person has more Which person has more influence over the U.S. influence over the U.S. economy? economy?

George BushGeorge BushBen Bernanke Ben Bernanke Dick CheneyDick CheneyYour economic teacherYour economic teacherAll of CongressAll of Congress

Ben Bernanke Ben Bernanke

Bernanke is the Bernanke is the leader of the United leader of the United States economy.States economy.

He supervises the Fed He supervises the Fed and tells them what to and tells them what to do.do.

Monetary Monetary PolicyPolicy

The plan to The plan to EXPANDEXPAND or or CONTRACTCONTRACT the money the money supply in order to supply in order to INFLUENCE INFLUENCE the cost the cost and availability of and availability of CREDITCREDIT..

After the Fed measures After the Fed measures the money supply in the money supply in the U.S., it decides to the U.S., it decides to use either use either EASY-MONEY EASY-MONEY POLICYPOLICY or or TIGHT-TIGHT-MONEY POLICYMONEY POLICY to to correct certain areas in correct certain areas in our economy.our economy.

Easy-Money PolicyEasy-Money PolicyLower interest rates Lower interest rates INCREASES the money INCREASES the money supply and creates jobssupply and creates jobs

lowers UNEMPLOYMENT lowers UNEMPLOYMENT and promotes economic and promotes economic growth.growth.

Tight-Money PolicyTight-Money PolicyRaises interest rates Raises interest rates (makes money TIGHT)(makes money TIGHT)

DECREASES the money DECREASES the money supply and slows supply and slows business activity to help business activity to help stabilize PRICESstabilize PRICES

3 Ways the Fed can control 3 Ways the Fed can control the money supply:the money supply:11. DISCOUNT RATE. DISCOUNT RATE22. OPEN MARKET . OPEN MARKET OPERATIONSOPERATIONS

33. RESERVE . RESERVE REQUIREMENTREQUIREMENT

Discount RateDiscount RateThe INTEREST rate The INTEREST rate the Fed charges its the Fed charges its MEMBER banks for MEMBER banks for the use of its the use of its RESERVES.RESERVES.

The “The “prime prime raterate”(minimum ”(minimum interest rate that interest rate that banks charge on banks charge on LOANS to customers) LOANS to customers) usually rises and falls usually rises and falls as the discount rate as the discount rate rises and falls. rises and falls.

Lowering the discount rate Lowering the discount rate encourages encourages BORROWINGBORROWING..

Borrowing encourages Borrowing encourages SPENDINGSPENDING..

Encourages economic Encourages economic GROWTHGROWTH..

Open Market Open Market OperationsOperationsOpen Market Open Market Operations (the MAIN Operations (the MAIN tool of the Fed) is the tool of the Fed) is the buying and selling of buying and selling of government government SECURITIES.SECURITIES.

What it doesWhat it doesTo contract the money To contract the money supply, the Fed will SELL supply, the Fed will SELL securities to people. securities to people. Because people are Because people are “getting rid” of their money “getting rid” of their money at that time, the money at that time, the money supply will SHRINK.supply will SHRINK.

To expand the money To expand the money supply, the Fed will BUY supply, the Fed will BUY securities back from securities back from people and businesses. people and businesses. That puts more money That puts more money back into the HANDS of back into the HANDS of consumers and expands consumers and expands the money supply.the money supply.

Reserve RequirementReserve RequirementThe money that MUST The money that MUST BE HELD by banks BE HELD by banks (either in their own (either in their own vaults or in their vaults or in their ACCOUNTS at the ACCOUNTS at the district Federal Bank).district Federal Bank).

A HIGH reserve A HIGH reserve requirement (like 15%) requirement (like 15%) requires that banks requires that banks must keep that money must keep that money and NOT loan it out.and NOT loan it out.

A LOW reserve A LOW reserve requirement requirement (2.5%) allows (2.5%) allows banks to loan out banks to loan out MORE money.MORE money.

Lowering the reserve Lowering the reserve requirement encourages requirement encourages BORROWINGBORROWING..

Borrowing encourages Borrowing encourages SPENDINGSPENDING..

Encourages economic Encourages economic GROWTHGROWTH..

While the Fed does use While the Fed does use the reserve requirement the reserve requirement tool to influence the tool to influence the economy, the Fed does economy, the Fed does not make frequent or not make frequent or dramatic changes in the dramatic changes in the reserve requirement.reserve requirement.

That would cause That would cause INSTABILITYINSTABILITY in the in the banking system. The banking system. The percentage does change percentage does change annually according to a annually according to a FORMULA specified in FORMULA specified in the Monetary Control the Monetary Control Act of 1980.Act of 1980.