Download The Federal Reserve Bank

The Role of the “Fed”
and Regulatory Agencies
Lesson 1
The Federal Reserve System
The Federal Reserve (Fed) Bank
Aim:
 What important role does the Federal
Reserve Bank serve?
Do Now:
 Identify why the level of interest rates in
the economy has an impact on the
activity in that economy.
The Federal Reserve (Fed) Bank
 Do Now answer: When interest rates
are low it is cheaper to borrow money and
invest it or to purchase all manner of
goods and services. This helps the
economy grow.
The Federal Reserve (Fed)
The Fed is an independent agency of the
U.S. Government. Its structure assures that
its actions are not dominated by a political
party or a geographical area.
Early History of the Fed
Goals of the Federal Reserve
System
The Federal Reserve was commissioned to
make decisions to achieve the following
goals for the US economy:
1. Price
Level
Stability
(low
inflation)
2. High
Employment (low
unemployment)
3. Promote
Economic
Growth
4. Stability
in Foreign
Exchange
Rates
Functions of the Federal Reserve
System
The Federal Reserve works to achieve the above
goals through the following functions:
1. Adjust monetary policy to reduce the risk of inflation
Monetary policy: How the Fed influences the amount
of money and credit in the U.S. economy. Controlling the
supply of money in the financial system can create
economic prosperity, while avoiding recessions, and
ensure price stability, while avoiding inflation. The Fed
can either inject money into the economy or take it out
to help stimulate or slow down the economy.
Additional Functions of the
Federal Reserve System
Regulate federally chartered banks and bank holding
companies
Provide the mechanism for clearing checks and
processing transactions
Additional Functions of the
Federal Reserve System
• Lender of Last Resort to Commercial Banks:
The Fed acts as the Lender of Last Resort to
institutions that do not have any other means
of borrowing and are experiencing financial
difficulty.
• It is required to lend money to these
institutions when private institutions will not
because they are considered very risky and
near collapse.
Additional Functions of the
Federal Reserve System
• The Fed will lend to these institutions
because, if it did not, their failure would
dramatically affect the economy.
• Commercial banks avoid borrowing from the
Fed because such action indicates that the
bank is experiencing a financial crisis.
Structure of the Federal Reserve
The structure
of the Fed is
based on the
concept that
control of
monetary
policy should
not be
politically or
geographically
concentrated /
dominated.
Structure of the Federal Reserve
Chairperson - Appointed by the President of the US. Serves 4 year
term. Janet Yellen is the current chairperson.
7 Members of Board of Governors - Appointed by President. Each
serves 14 year terms. Terms are staggered.
12 District Banks - Each district bank is headed by a President who is
elected by the other member banks. District Banks: NY, San Francisco,
Kansas City, Cleveland, Boston, Philadelphia, Richmond, Atlanta, St.
Louis, Dallas, Chicago and Minneapolis.
Federal Open Market Committee (FOMC) - A group that formulates monetary
policy by setting a target for the Federal funds rate. The FOMC is made up of
the 7 members of the boards of governors, the NY Federal Reserve President
and 4 rotating District Bank Presidents.
How the Federal Reserve
Controls Monetary Policy
Reserve requirements: Raising or lowering the amount
of reserves (the % of deposits banks are required to
keep in non-interest bearing accounts) that banks are
required to hold.
Increasing reserves requirement means banks have to
hold onto more money, which tends to tighten credit,
making fewer funds available for lending.
How the Federal Reserve Exercises
Monetary Policy
Open Market Operations: When the Fed buys from or
sells government securities to primary dealers in order
to increase or decrease the amount of money in the
banking system.
Primary dealers: A bank or broker-dealer that is able to
buy and sell directly with the Federal Reserve. They act
as market makers. Primary Dealers are very large banks
such as JP Morgan, Goldman Sachs, and UBS.
A full list of the primary dealers can be found on the
Federal Reserve Bank of New York’s website:
http://www.newyorkfed.org/markets/pridealers_listing.html
How the Federal Reserve Controls
Monetary Policy
To Decrease the Money Supply: The Fed will sell bonds
and securities. This reduces the dollars in the economy
because they sell bonds in exchange for dollars.
To Increase the Money Supply: The Fed
will buy existing bonds. This increases
the money supply because it injects
dollars into the economy.
Note on interest rates: If the economy is not running efficiently, the
Fed can cut the interest rate in order to encourage borrowing. If the
economy is too strong, the Fed can raise rates, which discourages
borrowing. Too much money in the banking system can be negative
and lead to inflation.
Open Market Operations in a RECESSION
Open Market Operations during INFLATION
Lesson Summary
1. How does the level of interest rates in the
economy relate to economic activity?
2. What are the major objectives of the Federal
Reserve Bank?
3. What is the primary mechanism by which the Fed
controls the amount of money and credit in the
economy?
4. How do the Fed maintain its independence from
political influences?
5. How many Federal Reserve Bank districts are
there?
6. What important role does Federal Reserve Bank
serve?
Web Challenge #1
Challenge: To combat the grave effects of the
Great Recession, the Federal Open Market
Committee (FOMC) embarked on a new
strategy by conducting several rounds of
quantitative easing.
What is quantitative easing? How many rounds
were conducted, and in what dollar amounts?
What do proponents of the program say it
accomplished? What do critics cite as the
primary risk with this program?
Web Challenge #2
Challenge: The governors of the different
Federal Reserve districts don’t all agree on the
state of the economy or the best course of
action that the Fed should take. Identify at least
one currently sitting Fed governor who has
recently expressed that he or she disagrees
with the Fed’s current course. Why does he or
she think it’s incorrect?
Hint: A dissenting governor will often make his
or her views heard during a speech he or she
has been invited to give.
Web Challenge #3
Challenge: Every six weeks the Chairperson of
the Federal Reserve reports to Congress.
Research the last visit made. What was the
most notable parts of the Chairperson’s
testimony? Was the better Chairperson’s
assessment of the economy better or worse
than the markets were expecting? How did the
markets react to the testimony?
Web Challenge #4
Challenge: Earlier, we listed four distinct goals
of the Fed. There is a lot of discussion about
whether it has too many objectives. Critics
argue that in trying to accomplish too many
things, it may cause more harm than good.
Research the one or two true “mandates” critics
argue the Fed should focus on exclusively.
What are they and why are they the most
important? What do you think? Why do or don’t
you agree?