Federal Reserve Homework Review

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The Fed’s Three Parts

1.The Board of Governors: Sets monetary policy, oversees bank regulation, and approves mergers of banks.

2. The 12 Federal Reserve Banks: Provide banking services to commercial banks, issue currency, and supervise member banks.

3. The Federal Open Market Committee (FOMC): Sets short-term interest rates and influences long-term rates.

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• Interest Rate Policy: The Fed’s most powerful tool. Raising rates slows borrowing and spending, cooling the economy. Lowering rates encourages borrowing and spending, stimulating the economy.

• Reserve Requirements: The Fed sets the minimum amount of reserves that banks must hold on deposit. Increasing reserve requirements reduces the money supply, slowing the economy. Decreasing reserve requirements increases the money supply, stimulating the economy. (Used less frequently today)

• Open Market Operations: The Fed buys and sells government bonds in the open market. Buying bonds injects money into the economy, lowering interest rates. Selling bonds removes money from the economy, raising interest rates.

​The Fed’s Tools of Monetary Policy

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• Maximum Employment: The Fed strives to promote a healthy job market with low unemployment.

• Price Stability: The Fed aims to keep inflation in check, ensuring a stable and predictable price environment.

​The Federal Reserve has a dual mandate. The actions to solve one have a negative effect on the other.