THE FEDERAL RESERVE SYSTEM

THE FEDERAL RESERVE SYSTEM

SSEMA2 The student will explain the role and the function of the

Federal Reserve System

History of the “Fed”History of the “Fed”When Alexander Hamilton 1st proposed the idea of a central bank in 1790, it was very controversial.

After Andrew Jackson destroyed the Bank of the United States in 1832, the rest of the 1800s did not see a central bank.

The Panic of 1907The Panic of 1907It was not until the

economic panic of 1907 did the Central Banking System idea make a comeback

The Panic of 1907 led to the collapse of many banks and endangered the entire money system

Panic of 1907Panic of 1907The panic of 1907 had 2 causes:

1. There was no plan for expanding the amount of money in circulation

2. The system of pyramid reserves failed.

The Federal Reserve was created to address these

issues.

The Federal Reserve BankThe Federal Reserve Bank

The Fed is both Public and Private in nature

Lets explore the characteristics of each side of the Fed

Public Characteristics of the Fed

Public Characteristics of the Fed

In 1913 Congress passed the Federal Reserve Act establishing a central bank more commonly known as the

“Fed”

Public Characteristics of the Fed

Public Characteristics of the Fed

1. Because it was established by Congress, Congress also has the power to dissolve it.

This means the Fed is accountable to the people.

Public Characteristics of the Fed

Public Characteristics of the Fed

2. There are 7 members of the Board of Governors

Each is nominated by the President and confirmed by the Senate.

They serve 14 year termsAmong these 7 members are a Chairman and a Vice-Chairman of the board who serve 4 year terms.

Janet Yellin

Public Characteristics of the Fed

Public Characteristics of the Fed

3. The Federal Reserve is the fiscal agent of the US governmentAs fiscal agent the Fed handles tax revenues and public debts

4. Federal Reserve Notes

The dollar value is backed by the assets

of the Fed

Public Characteristics of the Fed

Public Characteristics of the Fed

5. Profits earned by the Fed belong to the US government.The Fed transferred $88.9 billion in profits to the US Treasury in 2012

Private Characteristics of the Fed

Private Characteristics of the Fed

1. The Fed System is decentralized with 12 district banks serving the needs of different regions.

Private Characteristics of the Fed

Private Characteristics of the Fed

2. Each district has a Board of Directors2/3 of the board members are elected by the member banks of that district.

1/3 of the board members are elected by the Board of Governors at the Fed.

Private Characteristics of the Fed

Private Characteristics of the Fed

3. 5 District bank presidents serve along with the 7 members of the Board of Governors to make up the:

Federal Open Markets Committee (FOMC)The job of the FOMC is to make monetary policy decisions.

The New York Federal Reserve Bank President is always a voting member of the FOMC.

The other four spots rotate amongst the other 11 district bank presidents.

Private Characteristics of the Fed

Private Characteristics of the Fed

4. Each district Fed bank is a private corporation designed to earn interest and fees for the services they provide.

Atlanta Federal Reserve

District Bank

Monetary PolicyMonetary PolicyThe tools that the FOMC uses to stabilize our economy.

These tools are used to promote 1. Price Stability2. Full Employment3. Economic Growth

There are 3 main tools the FOMC uses:

Monetary Policy ToolsMonetary Policy Tools1. Open Market Operations:

This is the buying and selling of securities (gov’t bonds) on the open market.

When inflation is HIGH, the FOMC wants to reduce the money supply so they sell bonds.> Banks and individuals buy the bonds and

the money they use will be pulled from the supply.

> Less money is now available for loans and spending.

WWII Era Savings BondWWII Era Savings Bond

Monetary Policy ToolsMonetary Policy Tools1. Open Market Operations:

This is the buying and selling of securities (gov’t bonds) on the open market.

When the economy is slow, the FOMC wants to increase the money supply so they BUY bonds.> Banks and individuals sell the bonds and

the amount of money in circulation increases.

> More money is now available for loans and spending.

Monetary Policy ToolsMonetary Policy Tools2. Changes in the Discount Rate The discount rate is the interest rate the

Fed charges banks for the money they borrow from the Fed As inflation begins to rise, the Fed will

increase the discount rate They do this to encourage less spending

Monetary Policy ToolsMonetary Policy Tools2. Changes in the Discount Rate The discount rate is the interest rate the

Fed charges banks for the money they borrow from the Fed When the economy is struggling, the Fed may

reduce the discount rate. They do this to encourage more spending

Monetary Policy ToolsMonetary Policy Tools3. Changes in the Reserve Requirement

This is the percentage of customers deposits banks cannot loan to borrowersExample:

You deposit $1000 in the bankIf the reserve rate is 10%The bank may loan out $900, but

they must keep $100 in the vaultRarely used because the effects multiply