STRUCTURE OF THE FEDERAL RESERVE The Federal Reserve

STRUCTURE OF THE FEDERAL RESERVE

The Federal Reserve □ The Federal Reserve (Fed) serves as the nation’s central bank. u It is designed to oversee the banking system. u It regulates the quantity of money in the economy.

The Federal Reserve □ The Fed was created in 1914 after a series of bank failures convinced Congress that the U. S. needed a central bank to ensure the health of the nation’s banking system.

THE BOARD OF GOVERNORS □ Headquarters is in Wash. D. C. □ There are 7 members on the Board. □ They serve 14 year terms that are nonrenewable. □ They are appointed by the President with Senate approval.

□ The President also appoints the Chairman of the Board of Governors. He/she serves a 4 year term which can be renewed. □ The current Chairman is Ben S. Bernanke. □ He has served since 2006 and his term ends in 2020.

FEDERAL RESERVE BANKS □ There a total of 12 Federal Reserve districts. □ They monitor and report on economic and banking conditions in its district. □ Each district is made up of several states. □ Texas is in district 11. http: //www. federalreserve. gov/otherfrb. htm

The Federal Reserve System

MEMBER BANKS □ State and national banks use the FED for check clearing and reserve loans. □ The 4, 000 members banks contribute money to join and then own stock in the FED.

{FOMC} FEDERAL OPEN MARKET COMMITTEE □ Makes key decisions regarding interest rates. □ They meet about 8 times a year to discuss the cost of credit.

□ All 7 of the members of the Board of Governors of the FED sit on the committee, 5 of the 12 districts have bank Presidents sitting on the FOMC, and the President of the New York FED sits on the FOMC.

Three Primary Functions of the Fed □ □ □ Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. Acts as a banker’s bank, making loans to banks and as a lender of last resort – does NOT make loans to individual citizens. Conducts monetary policy by controlling the money supply.

Changing the Discount Rate □ The discount rate is the interest rate the Fed charges banks for loans. u Increasing the discount rate decreases the money supply. u Decreasing the discount rate increases the money supply.

Banks and The Money Supply □ □ Reserves are deposits that banks have received but have not loaned out. In a fractional reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest.

Money Creation When a bank makes a loan from its reserves, the money supply increases.

Money Creation □ □ □ When one bank loans money, that money is generally deposited into another bank. This creates more deposits and more reserves to be lent out. When a bank makes a loan from its reserves, the money supply increases.

FUNCTIONS OF THE FED □ It maintains a checking account for the Treasury Department. It processes payments like social security and IRS refunds. □ They issue paper currency and replace worn and torn currency.

□ The FED clears checks for member banks. All checks written go through a Federal Reserve bank and are cleared in about 2 days. They clear about 20 billion checks a year. □ The FED sends out bank examiners to check the activities of member banks. □ www. aplusfcu. org

□ They lend money for reserves to member banks on a daily basis. □ The FED monitors bank reserve requirements. □ The FED regulates the money supply by increasing or decreasing the amount of money in circulation.

WHAT EFFECTS MONEY SUPPLY? □ DISCOUNT RATE: □Interest rate banks pay to borrow from the FED. Higher rate, less borrowing, less money. □ RESERVE REQUIREMENTS: □Percentage of cash banks must keep in vault. Higher %, less available for loans.