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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