Lecture Notes: The Federal Reserve System Tour

Introduction to the Federal Reserve

• Presenter: Penny, tour guide to the Federal Reserve
• Objective: Explain the Federal Reserve System and its importance in plain English
• Structure of the Fed: Three main parts
  • Board of Governors (building in the middle)
  • Reserve Banks (12 other buildings)
  • Federal Open Market Committee (FOMC)
• Historical Context: Created in response to bank failures in the late 1800s and early 1900s

Creation and Purpose of the Federal Reserve

• Federal Reserve Act of 1913: Established to prevent banking panics and maintain economic stability
• Goals of the Fed:
  • Provide emergency cash reserves to banks
  • Facilitate quick and easy payments

Federal Reserve Structure

• Board of Governors:

  • U.S. government agency based in Washington, D.C.
  • Composed of seven members appointed by the President and confirmed by the Senate
  • Responsibilities:
    • Write regulations for commercial banks
    • Study economic trends and forecast economic directions
    • Oversee 12 reserve banks
    • Participate in the FOMC

• Federal Open Market Committee (FOMC):

  • Main body for monetary policymaking
  • Meetings: Eight times a year
  • Members: Seven governors, NY Fed president, four other reserve bank presidents (rotating)
  • Responsibilities:
    • Discuss and vote on monetary policy actions
    • Influence interest rates to affect consumer and business spending

Reserve Banks

• 12 Districts: Each served by a regional reserve bank with possible branches
• Main Responsibilities:
  • Provide financial services
  • Contribute to monetary policy
  • Supervise commercial banks

Financial Services

• Known as the "banker's bank"
• Daily tasks:
  • Safe transfer of money through the banking system
  • Provide payment services to all U.S. financial institutions
  • Example: Sorting currency, checking for counterfeit notes
• Competition: Fed competes with businesses to promote efficiency

Research Department

• Conducts monetary policy to maintain economic health
• Economists:
  • Experts on national economy aspects
  • Prepare research for FOMC meetings
  • Aim for low inflation
• Federal Funds Rate: Influenced by policy tools to steer economy

Supervision and Regulation

• Bank Regulation: Written rules for financial institutions (handled by the Board of Governors)
• Supervision: Enforcement of rules (done by 12 reserve banks)
  • Role of Fed examiners: Evaluate bank safety and regulatory compliance
  • Issue ratings and ensure corrective actions

Conclusion

• Recap of the Fed's Structure: Board of Governors, FOMC, Reserve Banks
• Main Responsibilities: Financial services, monetary policy, bank supervision
• Emphasis on the Fed’s role in fostering a healthy economy
• Further Information: Visit FederalReserveEducation.org