The Federal Reserve and Monetary Policy

1. CHAPTER 14 The Federal Reserveand Monetary Policy SECTION 1: The Federal Reserve System SECTION 2: The Federal Reserve at Work SECTION 3: Monetary Policy Strategies

2. SECTION 1 The Federal Reserve System Objectives: • How did the Panic of 1907 affect U.S. banking? • What are the purposes and characteristics of the Federal Reserve System? • How is the Fed organized?

3. SECTION 1 The Federal Reserve System Effects of the Panic of 1907 on U.S. banking: • caused the collapse of many banks • endangered the monetary system • broke the resistance to central banking

4. SECTION 1 The Federal Reserve System The Fed • Roles: • to supervise member banks • to hold cash reserves • to control circulation of money • Features: • lacks a single central bank • is owned and controlled by the member banks • makes membership optional for some banks

5. SECTION 1 The Federal Reserve System Structure of the Fed • National level: • Board of Governors—highest policy-making body • Federal Open Market Committee—made up of the Board of Governors, the Federal Reserve Bank of New York, and four other district bank members • District level: • 12 Federal Reserve banks • 25 branch offices • local member banks

6. Minneapolis Boston New York Chicago Cleveland Philadelphia . San Francisco Washington DC Kansas City Richmond St. Louis Atlanta *Alaska and Hawaii are under the jurisdiction of the Federal Reserve Bank of San Francisco Dallas Federal Reserve Districts

7. Board of Governors of the Federal Reserve System • 1 Chairman • 1 Vice-Chairman • 5 Directors • Regional Reserve Banks and Branches • 12 regional Federal Reserve banks • 25 branches of Federal Reserve banks Oversees • Federal Open Market Committee • 7 members of the Board of Governors • 5 Federal Reserve bank presidents Chief policymaking body of the Federal Reserve System Open market operations Provides services Financial institutions Federal government Federal Reserve Structure

8. SECTION 2 The Federal Reserve at Work Objectives: • What services does the Fed provide to banks? • How does the Fed serve the federal government? • How do economists measure the U.S. money supply?

9. SECTION 2 The Federal Reserve at Work Services the Fed provides to banks: • clearing checks • lending reserves to banks

10. SECTION 2 The Federal Reserve at Work Services the Fed provides to the government: • serves as the government’s bank • supervises the Fed’s member banks • regulates the national money supply

11. SECTION 2 The Federal Reserve at Work How economists measure the U.S. money supply: • M1—counts all currency in circulation, the value of all traveler’s checks, all checking account deposits, and deposits in all similar accounts in banks • M2—money counted in M1, plus money in money market accounts, money market mutual fund shares, and other savings deposits • M3—money counted in M2, plus all large time deposits, repurchase agreements, and some Eurodollars

12. SECTION 3 Monetary Policy Strategies Objectives: • Why does the Fed rely on either an easy-money or a tight-money policy? • How does the Fed make monetary policy? • What are the challenges associated with determining monetary policy?

13. SECTION 3 Monetary Policy Strategies Money policy • Easy-money policy: • to expand the money supply • to increase aggregate demand • to create jobs • Tight-money policy: • to slow business activity • to help stabilize prices • to restrict money supply • to reduce aggregate demand

14. SECTION 3 Monetary Policy Strategies How the Fed makes monetary policy: • open-market operations—buying and selling of government securities • discount rate—the interest rate that the Fed charges member banks for use of its reserves and which the Fed adjusts to encourage or discourage borrowing • reserve requirement—money that banks must hold in their vaults or accounts to meet demand requests

15. SECTION 3 Monetary Policy Strategies Challenges associated with determining monetary policy: • incorrect economic forecasts • time lags in enacting monetary policy • difficulties in establishing priorities and trade-offs • lack of coordination among government agencies

16. CHAPTER 14 Wrap-Up 1. How does the organization of the Federal Reserve System avoid placing too much power in a single bank? 2. Why is the Fed considered a “lender of last resort”? 3. How does the Fed put monetary policy to work? What are the characteristics of easy-money and tight-money policies? 4. What are the main difficulties the Federal Reserve encounters when developing monetary policy? 5. What tools does the Fed use to implement monetary policy?