The Federal Reserve System (FED) and its influence on

Money & Credit

REPORTED BY: CHARLENE M. ALMAIDA

THE FEDERAL RESERVE SYSTEM

• Is the central bank of the United States.

• It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

•The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.

THE FEDERAL RESERVE SYSTEM

FUNCTIONS OF THE FED1. CONDUCTS THE NATION’S MONETARY POLICY to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S economy

2. PROMOTES THE STABILITY OF THE FINANCIAL SYSTEM and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S and abroad

3. PROMOTES THE SAFETY AND SOUNDNESS OF INDIVIDUAL FINANCIAL INSTITUTIONS and monitors their impact on the financial system as a whole

FUNCTIONS OF THE FED4. FOSTERS PAYMENT AND SETTLEMENT SYSTEM SAFETY AND EFFICIENCY through services to the banking industry and the U.S government that facilitate U.S – dollar transactions and payments

5. PROMOTES CONSUMER PROTECTION AND COMMUNITY DEVELOPMENT through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations

Twelve Federal Reserve Districts operate independently but with supervision.

MONETARY POLICY• The term monetary policy refers to the actions that the Federal

Reserve undertakes to influence the amount of money and credit in the U.S. economy. Changes to the amount of money and credit affect interest rates (the cost of credit) and the performance of the U.S. economy. To state this concept simply, if the cost of credit is reduced, more people and firms will borrow money and the economy will heat up.

GOALS OF MONETARY POLICY

• The goals of Monetary Policy are to promote maximum employment, stable prices and moderate long-term interest rates.

•By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.

TOOLS OF MONETARY POLICYOpen market operations, Discount rate, Reserve requirements

OPEN MARKET OPERATIONS

• involve the buying and selling of government securities. The term “open market” means that the Fed doesn’t decide on it’s own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an “open market” in which the various securities dealers that the Fed does business with – the primary dealers – compete on the basis of price. Open market operations are flexible, and thus, the most frequency used tool of monetary policy.

TOOLS OF MONETARY POLICY

DISCOUNT RATE

• Is the interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.

RESERVE REQUIREMENTS

• Are the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank.

Federal Open Market Committee

• This is the policy-making branch of the Federal Reserve.

• The FOMC makes the important decisions on interest rates and other monetary policies.

• It is composed of the board of governors, which has seven members, and five Reserve Bank presidents.

MONEY SUPPLY

HOW THE FED CONTROLS THE MONEY SUPPLY?

• The required reserve ratio establishes a link between the reserves of the commercial banks and the deposits (money) that commercial banks are allowed to create.

• If the Fed wants to increase the money supply, it creates more reserves, thereby freeing banks to create additional deposits by making more loans. If it wants to decrease the money supply, it reduces reserves.

Components of Money Supply

• M1 , or Narrow money is money that can be directly used for transactions. It includes currency held outside banks, plus demand deposits, plus traveler’s checks, plus other checkable deposits.

• M2, or Broad money is M1 + savings accounts + money market accounts (which allows only checks for amounts above some minimum) + other near monies + fixed or time deposits, and negotiable certificates by banks.

DEMANDHow can the federal reserve increase aggregate demand?

• The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates.

• The Federal Reserve's direct effect on aggregate demand is mild. When it lowers interest rates, asset prices climb. Higher asset prices for assets such as homes and stocks boost confidence among consumers, leading to purchases of larger items and greater overall spending levels. Higher stock prices lead to companies being able to raise more money at cheaper rates.

• The Federal Reserve's largest effect in boosting aggregate demand is to create supportive financial conditions.

EQUILIBRIUM INTEREST RATES

• The point at which the quantity of money demanded equals the quantity of money supplied determines the equilibrium interest rate in the economy.

THANK YOU!!

QUIZ – No Acronym! – Wrong Spelling WRONG1. The Federal Reserve System (FED) is the central bank of what country?

2. If the Fed wants to increase the money supply, it creates more ________.

3. How can the Federal Reserve increase aggregate demand?

4. What is the policy-making branch of the Federal Reserve?

5. The point at which the quantity of money demanded equals the quantity of money supplied determines the ________ ________ ________ in the economy.

6-7 Give at least 2 key functions of the Fed.

8. Money that can be directly used for transactions.

9. These are the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank.

10. It refers to the actions that the Federal Reserve undertakes to influence the amount of money and credit in the U.S. economy.