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Federal Reserve System
• the central bank of the United States
• founded by Congress in 1913
• Its purpose: to provide the nation with a safer,
more flexible, and more stable monetary and
financial system
The Federal Reserve's duties fall into
four general areas:
▫ 1. conducting the nation's monetary policy by
influencing the monetary and credit conditions in
the economy
 Purpose of Monetary policy:
 1) Maximum employment
2)stable prices
3)moderate long term interest rates
• 2) supervising and regulating banking
institutions to ensure the safety and
soundness of the nation's banking and financial
system and to protect the credit rights of
consumers
• 3) maintaining the stability of the financial
system
• 4) providing financial services to depository
institutions
We’re not alone or the 1st
• Most developed countries have a central bank
whose functions are similar to those of the
Federal Reserve
▫ The oldest, Sweden's Riks bank, has existed since
1668 and the Bank of England since 1694
• During the nineteenth century and the
beginning of the twentieth, there were many
financial panics leading to bank failures and
business bankruptcies that severely disrupted
the economy.
• There were many runs on banks during these
panics.
▫ Short-term credit an important source of
liquidity was lacking
Federal Reserve Act
• Woodrow Wilson signed the act into law on
December 23, 1913
• The Federal Reserve System is considered to be
an independent central bank because its
decisions do not have to be ratified by the
President or anyone else in the executive branch
of government
• However; it is subject to oversight by the U.S.
Congress
12 Regional Federal Reserve Banks
Monetary Policy
• The first and most commonly used tool is open
market operations, which involves buying
and selling government bonds.
• When the central bank buys bonds, it increases
the amount of money in the economy; when the
central bank sells bonds, it reduces the amount
of money in the economy
Government Bond
• A bond is a debt investment in which an
investor loans money to an entity (corporate or
governmental) that borrows the funds for
a defined period of time at a fixed interest rate.
• A government bond is a bond issued by a
national government, generally with a promise
to pay periodic interest payments and to repay
the face value on the maturity date
• A second tool is the reserve requirement,
which is the percentage of deposits that banks
are required to hold and not lend out.
• A higher reserve requirement reduces the money
supply by limiting bank lending; a lower reserve
requirement increases the money supply by
increasing bank lending
• The third tool is the discount rate
• The interest rate the Federal Reserve charges
commercial banks for loans
Monetary Policy
• Unemployment:
▫ Fed keeps interest rates low, it can encourage
people to borrow and spend money and banks to
lend more. It increases consumption, which is part
of how we measure the economy’s growth.
▫ it sets a basic interest rate that governs how much
banks pay to borrow from the Fed.
 increasing federal spending and/or reducing taxes can
promote more employment and output, but these policies
eventually put upward pressure on the price level and interest
rates.
• Inflation: results from increases in the nation’s
money supply that exceeds increases in its
output of goods and services. (demand >supply)
• Changes in the money supply can influence
overall levels of spending, employment, and
prices in the economy by inducing changes in
interest rates charged for credit and by affecting
the levels of personal and business-investment
spending
• http://sffed-education.org/chairman/
• The Board of Governors of the Federal
Reserve System, whose members are appointed
by the President of the United States and
confirmed by the U.S. Senate, provides
leadership for the Federal Reserve System.
• The Federal Open Market Committee
(FOMC) is responsible for making monetary
policy decisions. The FOMC is composed of
members of the Board of Governors and
presidents of the twelve Federal Reserve Banks.
• Janet Yellen- chairperson of the Fed.
• Previous: Ben Bernanke