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Federal Reserve System
Benjamin Bernanke
Former Chair
Janet Yellen
Current Chair
Federal Reserve System
The central bank and monetary authority of
the United States; known as “the FED”.
A central bank is the government agency
that oversees the banking system and is
responsible for the amount of money
and credit in the economy.
From St. Louis Fed
The Fed’s Objectives
“Stable prices”
“Maximum employment”
Moderate long-term interest rates
From St. Louis Fed
Decision makers at the
Federal Reserve
The Board
of
Governors
FOMC
Federal
Open
Market
Committee
THE FEDERAL RESERVE AND
THE BANKING SYSTEM
Federal Open
Market Committee
Board of
Governors
12 Federal
Reserve Banks
Commercial
Banks
Thrift Institutions
(Savings & loan associations,
mutual savings banks, credit
unions)
The Public
(Households and
businesses)
From St. Louis Fed
Who owns the Fed?
Each of the 12 district Federal
Reserve banks is owned by its
member banks
The 12 Federal Reserve Banks
1. To regulate bank holding companies and state
chartered banks.
2. To supply money and credit to the economy to
maintain stable prices and full employment.
3. To ensure the smooth functioning of the
payments system.
4. To act as the government’s bank.
From St. Louis Fed
What are the
responsibilities of the Fed?
•
•
•
•
Influence our money supply
Issue and maintain our currency
Act as a clearing house for checks
Serve as a bank for the federal
government
• Serve as a “bankers bank”
• Act as a “lender of last resort” to
member banks
Does the FED loan money to
private companies and
individuals ?
No, they only do business
with financial institutions
They are the bankers’ bank!
How does the Fed influence the
money supply?
• Discount rate
• Open Market Operations
(Federal Funds Rate)
• Reserve requirements
What is the
Discount Rate?
The interest rate that
banks are charged
when they borrow
money from the Fed
Why would the member banks
borrow from FED at the
discount rate?
Banks have creditable
customers, but no
excess reserves.
What happens when the FED
lowers the discount rate?
MS
i%
In
C
AD
PL
RGDP
• Banks tend to borrow
more from the Fed,
increasing the growth
of the money supply
What happens when the FED
raises the discount rate?
MS
i%
In
C
AD
PL
RGDP
• Banks tend to borrow
less from the Fed,
slowing the growth of
the money supply
Which monetary tool is
most often used?
Open Market Operations
OMO
(FOMC)
Open Market Operations
Purchases and sales of
government securities by
the Federal Reserve in an
effort to influence the
money supply.
What is the role of the
Federal Open Market
Committee?
The FOMC makes decisions
about changing interest rates
which they can do by the
buying and selling of
government securities.
What happens when the FED
purchases government securities?
MS
i%
In
C
AD
PL
RGDP
• The money supply expands
• Interest Rate drops
• New investment and consumer
spending
• AD increases
• Price level and RGDP increase
What happens when the FED
sells government securities?
MS
i%
In
C
AD
PL
RGDP
• The money supply contacts
• Interest Rate rises
• Investment and Consumer
spending declines
• AD decreases
• Price level and RGDP decrease
What is the
Federal Funds Rate?
The interest rate that one
bank will charge another
bank to borrow money
overnight to cover its
reserve requirement.
If the FED buys bonds,
the federal funds
rate…?
Banks have more
reserves, so the Federal
Funds rate falls
If the FED sells bonds,
the federal funds
rate…?
Banks have fewer
reserves, so the Federal
Funds rate rises
What happens when the Fed,
changes in reserve
requirements
Lower reserve ratio raises the
money multiplier, thus
expanding the money supply
Higher reserve ratio lowers the
money multiplier, thus slowing
the growth of the money supply
What is the Prime
Interest Rate?
The interest rate that big
banks charge their best
and most credit worthy
customers.
Interest Rates
The FOMC targets the Federal Funds
Rate which sets rates for the following:
Federal Funds Rate
Prime Interest Rate
Business Loan Rate
Mortgage Rate
Auto Rate (new and used)
Personal Loans