Introduction to the Federal Reserve

The Federal Reserve or the Fed is the central bank of the United States of America. The Federal Reserve is a network of 12 regional Federal Reserve banks, but the Fed’s power center is in its New York bank.

The Fed’s Liabilities: Commercial banks’ reserves, government deposits, and mostly dollar bills

The Fed Assets: Emergency discount loans to banks and government securities.

The Money Supply is influenced mostly through manipulation of bank reserves. The Monetary base is equal to the currency in circulation plus the bank reserves. The Money Supply is a multiple of the monetary base (MB).

introduction to the federal reserve

Federal Reserve Policy Tools

1. Reserve Requirement

The Fed requires that commercial banks keep a certain amount of reserves with them, this is usually a percentage of the bank’s total assets. Usually – 10% but it’s rarely used because it’s too ineffective.

2. Discount Loans to Banks

The Federal Reserve acts as a lender of last resort. They used this tool extensively to lend to banks during the 2008 financial crisis.

3. Open Market Operations

Open market operations involves the buying and selling of securities in the open market. This is very similar to the Quantitative Easing policy used during the 2008 financial crisis

Structure of the Federal Reserve

The Federal Reserve system is composed of:

  • There are seven members of Fed Reserve Board of Governors – they sit on the Federal Open Markets Committee with five others. They are appointed by the U.S. president, confirmed by the senate and serve a 14 year term
  • The Term of the chairman is four years
  • There are 12 regional Fed banks.
  • The N.Y. Fed is the most powerful; they conduct open market operations and foreign exchange transactions
  • The N.Y. Fed president is a permanent member of Federal Open Markets Committee (FOMC) as the Vice President.
  • There are several thousand commercial banks.
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