Summary of How does Federal Reserve System (FED) Work Crash Course

Summary of "How does Federal Reserve System (FED) Work Crash Course"

Main Ideas and Concepts

The video provides a comprehensive overview of the Federal Reserve System (FRS), the central bank of the United States, explaining its structure, functions, duties, tools, and working mechanisms. It highlights the role of the FRS in regulating the U.S. economy and financial institutions, implementing monetary policy, maintaining financial stability, and providing banking services.

Detailed Outline

1. Basic Information on the Federal Reserve System (FRS)

Established in 1913 to ensure a safe, flexible, and stable economic condition.
Acts as an independent entity of the U.S. government.
Governed by a Board of Governors (7 members) appointed by the U.S. president and confirmed by the Senate.
Comprises a central board in Washington D.C. and 12 regional reserve banks.
Objectives: Promote sustainable economic growth, increase employment, maintain stable purchasing power, and keep long-term interest rates stable.
Provides three main financial services: Monetary policy, Banking supervision, and Financial services.

2. Structure and Functions of the Federal Reserve System

Key Functionalities:
- Conducting monetary policy.
- Supervising and regulating commercial banks.
- Maintaining financial market stability.
- Providing banking services.
Monetary Policy:
- Aims to achieve maximum employment and price stability.
- Controls money supply and interest rates.
- Uses expansionary policy (lower interest rates) to stimulate growth and contractionary policy (higher interest rates) to control inflation.
- Board of Governors sets discount rates and reserve requirements.
- Reserve requirement: Portion of deposits banks must hold and not circulate.
- Discount Window: Facility for banks to borrow from the Fed at a higher interest rate if unable to borrow from other banks.
- Federal Open Market Committee (FOMC) sets targets for federal funds rate based on market conditions.
Supervision of Banking System:
- Oversees ~5000 bank holding companies and 850 state member banks.
- 12 regional reserve banks provide services and collect regional economic data.
Maintaining Financial Stability:
- Prevents financial collapse and manages money flow at macro and microeconomic levels.
- Uses tools such as currency printing, reserve requirements, interest rates, and open market operations.
- Open Market Operations (OMO): Buying/selling U.S. government securities to regulate money supply.
- Federal funds rate: Interest rate for overnight lending between banks, influencing broader interest rates.
Banking Services:
- Reserve banks act as “banks of banks,” handling U.S. Treasury payments, currency distribution, check clearing, and loans to commercial banks.
- Provide electronic payment services via Automated Clearing House (ACH) and Fedwire systems.
- Serve as fiscal agents for the U.S. Treasury, managing savings bonds and government accounts.

3. Duties of the Federal Reserve System

Control and monitor money supply.
Regulate member banks by setting capital and reserve requirements.
Provide emergency loans during financial crises.
Promote strong banking system and healthy economy.
Provide banking services with transparency, safety, and efficiency.
Serve as a government bank managing treasury transactions and currency distribution.
Regulate financial activities and enforce federal laws on consumer credit and securities margin requirements.
Manage money supply to sustain economic growth and stabilize inflation.
Act decisively during crises by lowering interest rates, purchasing debts/bonds, and lending to financial institutions.

4. Federal Reserve System Tools

Reserve Requirement: Percentage of deposits banks must hold; affects money available for loans.
Fed Funds Rate: Interest rate for overnight loans between banks; set by FOMC.
Interest on Reserves: Interest paid by Fed on excess reserves held by banks.
Reverse Repos: Fed borrows from banks using U.S. Treasury securities as collateral.
Margin Requirements: Minimum collateral investors must provide for securities loans.
Open Market Operations: Buying/selling government securities to influence money supply and interest rates.
Discount Window: Lending facility for banks to borrow from Fed at a higher interest rate.
Discount Rate: Interest rate charged on loans via the Discount Window.
Money Supply: Total currency and deposits circulating in the economy; monitored to adjust monetary policy.

5. Working of the Federal Reserve System

Chairman and Vice Chairman of the Board of Governors appointed by the President, confirmed by Senate, serve four-year terms.
Chairman testifies before Congress and leads the FOMC.
FOMC meets eight times a year to review economic conditions and adjust monetary policy.
Uses reserve requirement, discount rate, and open market operations to control money flow.
Adjusts Fed funds rate to either stimulate or slow down the economy.
Policy decisions aim for steady economic growth, low unemployment,

Notable Quotes

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