The Federal Reserve • The Federal Reserve (Fed): central bank of United States • Created in 1913 to act as a lender of last resort of stop bank panics • Three responsibilities: 1.Monetary policy 2.Central banking 3.Bank regulation
Federal Reserve • Central bank – The Fed is a “bank for banks” – Offers support and stability for the banking system • Monitors and helps banks to exchange federal funds – Private bank deposits (reserves) at the federal reserve • Federal funds market and federal funds rate – Banks can lend and borrow federal funds, overnight loans – The interest rate on loans between private banks – Negotiated between private banks, not set by the Fed
Federal Reserve • Discount loans – Loans from the Fed to private banks – The Fed is the “lender of last resort” – Not used frequently, but reassuring during crises • Discount rate – The interest rate on discount loans • Regulates individual banks – Sets and monitors reserve requirements, limits risks
Federal Reserve: A Bank for Banks
Structure of Federal Reserve • Fed’s structure reflects fear of centralized power: • In principle power is divided among states and regions, public and private sector, banking and other industries.
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