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The Federal Reserve System

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Brain Teaser

• Why do you think it crucial to have one central bank in the United States?

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The Federal Reserve System (Fed) is the

central bank of the United States

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The Federal Reserve is known as a banker’s bank• When people or

corporations need money they borrow from a bank

• When banks need money they borrow from the (Fed) Federal Reserve

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Structure and Organization of the

Federal Reserve• The US is divided

into 12 Federal Reserve Districts

• Each district has 1 Federal Reserve Bank

• Most Federal Reserve Banks have smaller branch banks in their districts

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The Board of Governors• There are 7 members on

the Federal Reserve Board of Governors

• They are appointed by the President and confirmed by the Senate

• The members are independent from Congress, because they do not depend on them for funds

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Federal Reserve banks act as a banker’s bank

by issuing currency and

regulating the amount of money in

circulation.

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The 2 ways the Federal Reserve acts as the Government’s Bank

1. Issuing Currency2. Regulating the

amount of money in circulation

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1. Issuing Currency

• Currency includes paper money and coins

• Money is produced by the Federal Government but controlled by the Federal Reserve

• The Federal Reserve deals with damaged currency as well

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2. Regulating Currency

• Federal Reserve conducts the nation’s monetary policy

• The Federal Reserve can change the supply of money in the US economy

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Ways the Federal

Reserve Bank Slows the Economy

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To slow the economy, the

Federal Reserve Bank restricts the

money supply, causing

interest rates to rise.

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The 3 ways the Federal Reserve Bank slows the

economy1. Increases the reserve

requirement2. Raises the discount rate3. Sells government securities

(bonds)

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1. Increases the reserve requirement

• When the Fed does this, banks must leave more money with the Fed

• If more money is left with the Fed, then there is less money to loan people

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2. Raises the discount rate

• The discount rate is the rate the Fed charges smaller banks for loans

• If the rate is raised, banks will be less likely to borrow money from the Federal Reserve Bank

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3. Sells government securities

• The Fed can sell government bonds to increase interest rates

• Increased interest rates means less spending in the economy

• Less spending means the economy slows down

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Ways the Federal Reserve

Bank Stimulates

the Economy

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To stimulate the economy the Fed increases the money supply, causing interest rates to decline.

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The 3 ways the Federal Reserve stimulates the

economy1. Lowers the reserve requirement2. Lowers the discount rate3. Purchases government securities

(bonds)

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1. Lowers the reserve requirement

• The opposite of raising it results in banks having more money to loan people

• More loaned money = people spending money in the economy

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2. Lowers the discount rate

• Low discount rates encourages banks to borrow more money from the Federal Reserve

• More money borrowed=more money to loan to consumers in the economy

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3. Purchases government securities • Buying bonds from

investors puts more money in investor’s hands

• This increases the money supply

• Consumers and businesses then borrow more money, which stimulates economic growth

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Scenario 1

• What would you recommend in the following situation:– The nation is coming off years of

strong economic growth and there are fears of high inflation. Banks are making loans very freely at very low interest rates.

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Scenario 2

• What would you recommend in the following situation:– Economic activity is beginning to slow

down as credit (loans) is less available. Demand for goods is falling and few people have extra money to spend to stimulate production. High interest rates are making it more expensive to borrow money.

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SO WHAT??? What is important to

understand about this?

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The Federal Reserve System,

acting as the central bank,

regulates the money

supply.

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How much do you

remember?

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1. Which of these is NOT a way the Federal Reserve influences banking?

a. It controls the amount of money in circulation.

b. It regulates how much money banks must keep on hand.

c. It controls the interest rates that banks borrow money at.

d. It regulates the interest rate for home mortgages.

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2. Which of these will the Federal Reserve NOT do

when it wants to stimulate the economy?

a. buy back government bonds

b. lower the rate banks borrow money

at

c. sell government bonds

d. lower the amount of money that

banks must keep on hand