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The Federal Reserve System and Monetary Policy

Organization and Functions of the Federal Reserve System

Charly Adkinson

on 12 March 2012

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Transcript of The Federal Reserve System and Monetary Policy

The Federal Reserve System
Thank you for your attention!
Congress created the Federal Reserve System or the Fed in 1913
It was created as the central banking organization in the U.S.
Its main purpose was to end the periodic financial panics that had occurred during the 1800s and 1900s.
The Board of Governors directs the operations of the Fed. It supervises the 12 Federal Reserve district banks. The 7 full-time members are appointed by the President of the U.S. and he also chooses one member to serve as a chairperson. Each member serves a 14 year term. Their decisions are not subject to the approval of the President or Congress. This is our current chairman...
The Fed
Organization of the Fed
Board of Governors
Board of Governors
Federal Open Market Committee
Federal Advisory Council
Board of Governors
Head of NY Fed Bank
4 Fed District Banks
7 members appointed by the President
12 Members
Federal Reserve Banks
12 District Banks
25 Branch Banks
Member Banks
The Federal Reserve System is made up of:
Board of Governors

Federal Advisory Council
Federal Open Market Committee

Federal Reserve district banks
25 branch banks
approx. 2,600

member banks
Janet Yellen
And this is where she works...
The Fed headquarters in Washington, D.C.
Federal Reserve Districts
Federal Reserve Banks
The U.S. is divided into 12 Federal Reserve districts. Each district has a Fed district bank. Each bank is set up as a corporation owned by its member banks.
Member Banks
All national banks are required to become members of the Fed. To become a member bank, a national or state bank buys stock in its district's Federal Reserve bank. All institutions that accept deposits must keep reserves in their Fed district bank.
Benefits of Member Banks
Member banks receive dividends on their stock in the district banks. They are also able to vote for 6 of the district bank's 9 board members.
Federal Advisory Council
The Federal Advisory Council is made up of 12 members elected by the directors of each Federal Reserve district bank. The FAC meets at least 4 times per year and reports to the Board of Governors on general business conditions in the nation.
This is the representative for our district...
Kelly S. King
The 12 voting members of the FOMC meet 8 times a year to decide the course of action that the Fed should take to control the money supply. They determine whether to raise or lower interest rates. This committtee's actions have a huge effect in the financial world!
Federal Open Market Committee
Clearing Checks
Fiscal Agent
Holding Reserves
Supplying Paper Currency
Regulating the Money Supply
Functions of the Fed
The Fed has many functions.
The most important is regulating the money supply
Check clearing
is also an important and complex function. It's the method by which a check that has been deposited in one institution is transferred to the issuer's depository institution.
Functions of the Fed
Truth in Lending Act of 1968
Consumer Protection
The Fed also set standards for certain types of consumer legislation, mainly truth-in-lending legislation. By law, sellers of goods and services must make some kinds of information available to people who buy on credit. This includes the amount of interest and size of the monthly payment to be paid.
The Fed is responsible for

monetary policy
. Monetary policy involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit.
Monetary Policy
12 Members
Loose money & Tight money
Monetary Policies
Loose Money
Encourages economic growth
Businesses expand, people are employed and spend more.
Credit is abundant and is inexpensive to borrow
Tight Money
Control inflation
Businesses halt expansion, unemployment increases, and production is reduced
Credit is scarce and more expensive to borrow.
The cost of credit is the interest that must be paid to get it. As the cost of credit increases, the quantity demanded decreases. On the other hand, if the cost of borrowing drops, the quantity of credit demanded rises.
The banking system is based on
fractional reserve banking
. This is a system in which only a fraction of the deposits in a bank is kept on hand. The rest is available to lend.
Fractional Reserve Banking
The Fed has set
reserve requirements
for many banks. That is regulation set by the Fed that requires banks to keep a certain percentage of their deposits as cash in their own vaults or as deposits in their bank.
Banks must hold these reserves in case one or more customers decided to withdraw large amounts of cash from their checking accounts.
Fractional Reserve Banking
How is the Fed organized?
The Fed consists of the Board of Governors, the Federal Advisory Council, the Federal Open Market Committee, Federal Reserve banks, and member banks.
Why does the Head of the NY Fed bank get a permanent seat?
Because Wall Street which is in NY is the hub of our financial system.
Who is in charge of Fiscal policy?
The FAC members come from each of their districts with their own takes on the economy. When they come together they reach a common decision and take that to the FOMC.
However, currency is a small part of the money supply. A larger portion consists of the funds that the Fed and customers have deposited in banks. Since banks are not required to keep 100% of their deposits in reserve, they can use the excess to create new money. For example...
Money Expansion
How might money expansion work differently without the requirement of reserves?
Banks would be able to lend out or invest up to their entire deposits. This increased investment could lead to a greater or quicker expansion of money. This could also lead to major problems if people suddenly wanted to withdraw those invested funds.
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