The Federal Reserve system

Open market operations

Bank discount rates encourages borrowing by member banks, and therefore encourages borrowing by consumers; most frequent method of controlling the economy ~Purpose: regulate money supply

The Two arms of " The Fed"

Board of Governors and District Federal Reserve Banks

How the Fed is organized?

By the members of the Board of Governors and having bi-weekly meetings

Treasury Bills and Bonds

loans to gov in various amounts and for various time periods ~Adv.: offers a fixed rate of interest over a fixed period of time and attractive because not subject to income taxes ~Disadv.: Cannot be easily transferred and are not non-negotiable

Tight money

policy when less money is available at higher interest rates, slows (stabilizes) economy

Loose money

policy when more money is available at a lower interest rates, increases (stimulates) economy

Who participate in the Federal Reserve Act?

All national banks (They are prior to the Act anyone can issue currency or coin money.)

The Federal Reserve System services

1. Supervision of banks 2. Agent for the federal gov 3. Regulates monetary policy 4. Lends money to member banks 5. Acting as a clearing house 6. Participation in open market activities 7. Set loan limits and standards 8. Supplies currency

Acts as Clearing House

Clears/Processes/Settles checks for member banks The Fed uses the Automated Clearing House (ACH) to electronically complete fund transfer (check settlements) between banks; Inter-district Settlement Fund in Washington, DC used for between districts transfers; Checks/deposit slips have Magnetic Ink Character Recognition (MICR) coding; Scanners read MICR on checks to electronically processes data accurately and rapidly through the ACH and Inter-district Settlement Fund

National Banks

Each division of the US are called districts. There are 12 districts in the US and every state comes under a district. Each Federal Reserve Bank is a corporation, owned by its members banks.

Supervision: Audits Member Banks

Inspect banks by auditing financial records (Audit- an inspection of records to verify the: 1. accuracy of books (records) of the bank 2. bank is complying with banking laws

Supervision: Set Reserve Requirements

Member banks are required to keep a 10% of all deposits in the bank's vault or on deposit with the district Fed; Reserves: funds set aside for emergencies; Purpose: to reduce risk of bank panics and protect depositor's money

Lends money to member banks

Monitors the discount rate of interest - rate used by the Fed to loan money to member banks; the Fed changing interest rates affect borrowers (member banks) who pass rate to consumers *Raising rate- discourages borrowing *Reducing rate- encourages borrowing

District Federal Reserve Banks

Represents the business/private sector

Board of Governors

Represents the gov/public sector; they have bi-weekly meetings on Mon and Wed; The public are allowed to see their meetings and they usually talk about monetary policy such as raising/lowering interest rates

Participates in Open Market

The Fed can participate in open market operations by buying and selling government securities (issuing Treasury bills and bonds)

Regulates Monetary Policy

The Fed determines amount of money in circulation and available for loans, than either increases or decreases to stabilize/stimulate the economy (Tight or loose money)

Agent for Federal government

The Fed holds a checking account for the US Treasury: *Disburses social security benefits and other transfer payments using the direct deposit system* and *Accepts some types of federal tax money*

Monetary Policy

When the Fed influences money and credit conditions in the economy to achieve economy goals

The Federal Open Market Committee (FOMC)

controls the open market operations

Federal Reserve System

the central bank of the US; also called "The Fed"

Supervision: Approves Bank Mergers

they merge banks to increase competition (to offer customers more location, a variety of services more efficiently and to compete with a growing array of other financial service companies such as: *money market and other mutual funds*, *mortgage companies*, *credit unions*, and *credit arms of industrial firms*

The Fed Purpose

~ to provide the nation with a safer, more flexible, and more stable monetary and financial system * to establish and maintain confidence in the US monetary system; ensure a safe,healthy,and stable economy; supervise and regulate member banks and help serve the public efficiently