The Federal Reserve System is the central bank of the United States. It was created in 1913 to provide a safer and more stable monetary and financial system. The Fed has several key functions including conducting monetary policy, promoting financial stability, and overseeing banks. It uses various tools like open market operations, adjusting reserve requirements and interest rates to influence the money supply and achieve its goals of maximum employment, stable prices and moderate long-term interest rates.

1. The Federal Reserve System (FED) and its
influence on
Money & Credit
REPORTED BY: CHARLENE M. ALMAIDA

2. 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.

3. THE FEDERAL RESERVE SYSTEM

4. FUNCTIONS OF THE FED
1. 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

5. FUNCTIONS OF THE FED
4. 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

6. Twelve Federal Reserve Districts operate
independently but with supervision.

7. 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.

8. 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.

9. TOOLS OF MONETARY POLICY
Open 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. DEMAND
How 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.

15. 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.

16. THANK YOU!!
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17. QUIZ – No Acronym! – Wrong Spelling WRONG
1. 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.