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Monetary Policy – actions the Fed takes to influence the level of real GDP and the rate of inflation in the economy
(The Fed = The Federal Reserve)
The Board of Governors Headquartered in Washington, D.C.7 members Appointed by President, confirmed
by Senate Staggered terms of 14 years
Why?Geographical restrictions
Appointed by President, confirmed by Senate4-year terms, renewable Alan Greenspan was a notable Chairman (took office in 1987 - 2006)
•This is Ben Bernanke.•Does anyone know the newest Chairman of the Federal Reserve?
•Janet Yellen was sworn in as Chair of the Fed in February 2014.•She is the first woman to hold this position!
•12 federal reserve districts•One federal reserve bank located in each•Each monitors and reports on economic and banking conditions in its district•Each bank has board of nine directors that represents many groups’ interests
In which district is Pittsburgh located? Where is our district Fed bank, then?Color your maps
All nationally chartered banks are required to join Federal Reserve System
Many state-chartered banks join voluntarily
Approximately 4,000 Fed member banks
FAC (Federal Advisory Council) collects info about each district and reports to Board of Governors
Makes key decisions about interest rates and growth of money supply
Meet 8 times a year Members come from
Board of Governors and district reserve bank presidents
Serving Government Federal Government’s
banker Government securities
(bonds, bills, and notes) selling
Issuing currency
Check Clearing – how banks record whose account gives up money and whose account receives money
Supervising lending practices ▪ Monitors bank reserves to
make sure banks don’t lend out too much money at one time
▪ Study proposed bank mergers to make sure there is competition
▪ Enforce truth-in-lending laws – must give full and accurate info about loan terms
Lender of Last Resort▪ Usually, banks borrow
from each other to meet their daily reserve requirement (fed funds rate)
▪ Sometimes they need to borrow from Federal Reserve (discount rate)
Reserves – fractions of funds that banks have to hold (can’t loan out and earn interest) Banks report to Fed
about their reserves daily
Bank examinations Examiners make
unexpected bank visits to make sure banks aren’t being too risky
The Fed considers M1, M2, and M3 – compares the money supply to the demand for money
Factors that Affect Demand for Money Cash needed on
hand Interest rates Price levels in the
economy General level of
income
Stabilizing the Economy Too much money in
the economy leads to inflation
Fed tries to increase MS to match the growth in demand for money
Reserve Requirement RatioRates (Fed Funds Rate and Discount
Rate)Open Market Operations
The fraction of reserves that banks MUST hold (what they cannot lend out)
If the Fed wants to increase the money supply, they can lower this Would free up more money for them to lend
out If the Fed wants to contract the money
supply, they can raise this. Would make banks hold on to more money
and able to lend out less.
Both the fed funds rate and the discount rate are the interest rates that BANKS must pay to borrow money Fed funds rate – the rate banks pay to
borrow money from OTHER BANKS Discount rate – the rate banks pay to
borrow money from the Fed If the Fed wants to increase the money
supply, they will lower these rates so that banks can borrow more money (and then lends out more money to customers)
The buying and selling of treasury securities
(Think savings bonds, war bonds, etc.) If the Fed wants to increase the money
supply, they will BUY bonds from the public (because this will put money in people’s hands)
If the Fed wants to decrease the money supply, they will SELL bonds to the public (because this will take money out of people’s hands)