FEDERAL RESERVE

BANK
Presented by
Enu Sambyal
3rd semester
The Federal Reserve System (the
Fed) is the central bank of the United
States.
 ORIGIN OF FEDERAL
RESERVE SYSTEM
Resistance to establishment of a central bank

Fear of centralized power

Distrust of moneyed interests

No lender of last resort

 Nationwide bank panics on a regular basis
 Panic of 1907 so severe that the public was
convinced a central bank was needed

Federal Reserve Act of 1913


Elaborate system of checks and balances
 Decentralized
 The Federal Reserve System was created by Congress
in 1913 through the Federal Reserve Act.  Signed into
law by President Woodrow Wilson on December 23,
1913, the Act was "to provide for the establishment of
Federal Reserve Banks, to furnish an elastic currency,
to afford means of rediscounting commercial paper, to
establish a more effective supervision of banking in
the U.S., and for other purposes". , the Federal Reserve
Act created a decentralized central bank which
balanced the competing interests of private bankers
and public citizens.

 Started in 1913, 12 regional Federal Reserve banks

(the system consists of 12 districts)
 FUNCTIONS OF FEDERAL
RESERVE BANK
Clearing interbank payments
Regulating the banking system
Assisting banks in a difficult financial
position.
Managing exchange rates and the nation’s
foreign exchange reserves.
Managing exchange rates and the nation’s
foreign exchange reserves.
Lender of last resort: The Fed provides
funds to troubled banks that cannot find
any other sources of funds.
12 FEDERAL RESERVE
BANKS
STRUCTURE OF FEDERAL
RERSERVE SYSTEM
BOARD OF GOVERNORS
BEN.S.BERNANKE
DANEIL K. TARULL
DONALD L KOHN
Vice chairman
KEVIN M.WARSH
ELIZABETH A .DUKE
 BOARD OF GOVERNORS
The seven members of the Board of Governors are
appointed by the President and confirmed by the Senate
to serve 14-year terms of office. Members may serve only
one full term, but a member who has been appointed to
complete an unexpired term may be reap pointed to a full
term.
Only one member of the Board may be selected from
any one of the twelve Federal Reserve Districts. In
making appointments, the President is directed by law to
select a "fair representation of the financial, agricultural,
industrial, and commercial interests and geographical
divisions of the country.".
 RESPONSIBLITIES OF
BOARD OF GOVERNORS
The primary responsibility of the Board members is the
formulation of monetary policy. The seven Board
members constitute a majority of the 12-member
Federal Open Market Committee (FOMC).
The Board sets reserve requirements and shares the
responsibility with the Reserve Banks for discount rate
policy. These two functions plus open market operations
constitute the monetary policy tools of the Federal
Reserve System.
The Board also sets margin requirements, which limit the
use of credit for purchasing or carrying securities.
 FEDERAL OPEN MARKET
COMMITTEE
FOMC is the most important monetary policymaking
body of the Federal Reserve System. It is responsible for
formulation of a policy designed to promote economic
growth, full employment, stable prices, and a sustainable
pattern of international trade and payments.
The FOMC makes key decisions regarding the conduct
of open market operations—purchases and sales of U.S.
government and federal agency securities .
which affect the provision of reserves to depository
institutions and, in turn, the cost and availability of
money and credit in the U.S. economy .
 FEDERAL OPEN MARKET
COMMITTEE
The FOMC is composed of the seven members of the
Board of Governors and five Reserve Bank presidents.
The president of the Federal Reserve Bank of New
York serves on a continuous basis.
By law, the FOMC must meet at least four times each
year in Washington, D.C. Since 1981, eight regularly
scheduled meetings have been held each year at
intervals of five to eight weeks .
Before each regularly scheduled meeting of the FOMC,
System staff prepare written reports on past and
prospective economic and financial developments that
are sent to Committee members and to nonmember
Reserve Bank presidents.
After these reports, Policy is implemented with
emphasis on supplying reserves in a manner
consistent with objectives and with the nation's
broader economic objectives.
Open market operations as directed by the FOMC
are the major tool used to influence the total
amount of money and credit available in the
economy.
The Federal Reserve attempts to provide enough
reserves to encourage expansion of money and
credit in keeping with the goals of price stability
and sustainable growth in economic .
CONTROLS MONEY SUPPLY
Three tools are available to the Fed for changing the
money supply:
1. changing the required reserve ratio;
2. changing the discount rate;
3. engaging in open market operations.
REQUIRED RESERVE RATIO
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, the Fed

can decrease the required reserve ratio, which allows
the bank to create more deposits by making loans.
 DISCOUNT RATE
If the Fed wants to increase the money supply, the Fed
can decrease the required reserve ratio, which allows
the bank to create more deposits by making loans.

Bank borrowing from the Fed leads to an increase in the

money supply. The higher the discount rate, the higher
the cost of borrowing, and the less borrowing banks will
want to do.
OPEN MARKET OPERATIONS
Open market operations is the purchase and sale by
the Fed of government securities in the open market; a
tool used to expand or contract the amount of reserves
in the system and thus the money supply.

Open market operations is by far the most significant tool

of the Fed for controlling the supply of money.
Open market operations is by far the most significant tool of the
Fed for controlling the supply of money.
An open market purchase of securities by the Fed results in an
increase in reserves and an increase in the supply of money by an
amount equal to the money multiplier times the change in
reserves.
An open market sale of securities by the Fed results in a decrease
in reserves and a decrease in the supply of money by an amount
equal to the money multiplier times the change in reserves.
 Central Bank Independence and
Macro Performance in 17 Countries
Gold bars in the Federal Reserve Bank of
New York's Gold Vault
 REFERENCES
www.federalreserve.gov
Gupta.Shashi.k , banking and insurance
,kalyani publishers (2003).
www.wikipedia.com