The Federal Reserve

What is it? &

What does it do?

The Federal Reserve

National Bank The Banker’s Bank The Government’s

Bank The Fed

The Federal Reserve There were several prior attempts to create

a “National Bank” but none of them really succeeded

The “Panic of 1907” was a series of banking problems that convinced the government we needed a federal bank.

The finished product was the Federal Reserve. Finally created six years later in 1913.

Reformed several times. 1935 was the last.

Structure of the Federal Reserve Board of

Governors (7) Federal Reserve

Banks (12) Member Banks

(4,000) Other Depository

Institutions (25,000)

Structure of the Federal Reserve Board of Governors

7 members Serve 14 year terms Cannot serve consecutive

terms All from different regions President nominates

membership and Senate approves

President appoints the chair of the Board and Senate confirms

Structure of the Federal Reserve

Federal Reserve Banks:

- Twelve District Banks

- More than one state in each district

Functions of the Federal Reserve Four Primary

Functions1. Serve the

Government2. Serve Banks3. Regulate Banking

System4. Regulate the Money

Supply

Serving the Government Acts as the bank for the U.S. government. Acts as agent for the U.S. Treasury

Buys, Sells and Auctions: bonds, bills and securities

Issues Currency Exchanges new bills for old ones

Serving Banks Clears Checks Supervising Lending Practices

Ensures full disclosure Lender of Last Resort

Lends to banks when they need it

Discount Rate: the interest rate they charge

It’s a high rate

Regulates the Banking System Monitors the

Reserves each bank holds

Periodically Examines Banks Can classify a bank as

a “problem bank” and give it more frequent examinations

Regulates the Money Supply Reduces money supply when necessary to

keep inflation down. Increases money supply to match growth

in demand