The Federal Reserve

What is the Federal Reserve??

central bank of the US

created in 1913 by an act of Congress & restructured after the Great Depression

created to provide a safer, more flexible and more stable monetary & financial system

How is the Fed structured? overseen by 7-member Board of

Governors12 districts – 1 Federal Reserve bank per

district

Member banks – all nationally chartered banks must join the Federal Reserve system

-- contribute funds & receive stocks & dividends from the system

-- Federal Reserve System is owned by banks, not government

What is the FOMC?

Federal Open Market Committee -- Board of Governors of the Fed Reserve & 5 district bank presidents -- make key decisions about interest rates

& the growth of the US money supply

check clearing - process by which banks record whose account gives up $ and whose account receives $ -- mostly done electronically now

What is Monetary Policy?

the actions taken by the federal reserve to regulate the economy

3 monetary policy tools: 1. Discount Rate 2. Required Reserve ratio 3. Open Market Operations

1. Discount RateThe interest rate that banks pay to

borrow money from the Federal Reserve

Reducing the discount rate – encourages people to borrow money -> increases money supply & helps economy grow **used during recession**

- period of contraction

Increasing discount rate – discourages borrowing -> decreases money supply & slows economy down

*** used during periods of inflation*** -- period of expansion & rising

prices

2. Required Reserve Ratio

the fraction of deposits banks must keep on hand

reducing the RRR – frees up money for loans -> puts more $ in circulation

– helps economy grow increasing the RRR – keeps more $ out of circulation – slows economy down

3. Open Market Operations

the buying and selling of government bonds

with Federal Reserve Fundswhen the Fed buys bonds, more money

is put into circulation – helps the economy grow

when the Fed sells bonds, money is taken out of circulation – makes the economy slow down