The Federal Reserve System the Fed 12 Federal

The Federal Reserve System “the Fed”

12 Federal Reserve Districts Commercial banks’ banker

Board of Governors

Board of Governors • 7 members – – appointed by president approved by Senate 14 yr. term chairman • Ben Bernanke • formerly – Alan Greenspan

6 Major Jobs of the Fed • • • Supply the economy with paper money and coins. Hold bank reserves. Provide check-clearing services Supervise member banks Serve as lender of last resort. Control the money supply

1. Supply the economy with paper money and coins. “U. S. Mint” Bureau of Engraving and Printing

2. Hold bank reserves at the Fed + vault cash =total reserves

3. Provide check-clearing services • Facilitates check-cashing between commercial banks. – for example, Wells-Fargo and Bank of America

Between banks, cities • EXAMPLE: • Pete pays Sue for a used car. He gives her a check for $2, 000. • Sue deposits the check in her bank and is credited with $2, 000 in her account. • Sue’s bank sends the check to FRB who increases the bank’s reserve account by $2, 000. • FRB decreases Pete’s bank’s reserve by $2, 000 • FRB notifies Pete’s bank to reduce Pete’s account by $2, 000.

4. Supervise member banks 5. Serve as lender of last resort • Fed may “audit” a bank – check that the loans it made are good – be sure it has followed banking rules – verify the accuracy of its accounting. • Fed can lend funds to struggling banks. – Glass-Steagall Act (1933) establishes FDIC

6. Control the money supply. I kept the most important for last! • Tools for changing the money supply – Reserve Requirement – Discount Rate – Open Market Operations Why is changing the money supply important? TO CONTROL INFLATION and/or UNEMPLOYMENT Monetary Policy