Introduction to the Federal Reserve

Alright, so now I want to introduce you to the Federal Reserve and how it's composed. So the Federal Reserve is the Central Bank of the United States, and I want to make a quick note before we get into this, a lot of professors have a different amount of weight that they put onto this topic. So the Federal Reserve, we're gonna learn a lot about how it's composed, how many people there are involved in each, certain thing, how long their terms are. Um Some professors love to ask multiple choice questions about this and this is just stuff you have to commit to memory, but a lot of them, they just overlook it because they know that it's just kind of remember this and do you know the answer or not? So I'm putting this in here just in case you need to know it, but definitely double check with your professor and see how deep he's gonna get into all of these details. So, the Federal Reserve was created in 1913. The Central Bank of the United States. We created it in 1913 after a series of bank failures. So what is a banking failure generally, it's it's when there's the bank doesn't have enough money uh to to pay out its depositors. So, a bank run is when many depositors simultaneously decide to withdraw their money. Okay, so a bank run, maybe they heard that the bank is in serious financial trouble and they want to get their money out immediately. Right? So everyone starts to hear this and it begins this kind of cycle effect and everyone tries to deposit. But what's the problem with that Is the reserves. Right, as we've learned about reserves? Well, they don't hold all the deposits as reserves. They're loaning some of it out. And if everyone comes to try and withdraw their money at the same time, well, it's not gonna be there. Right. So this is what happened in 1913. Is not only was there a bank run? This actually was a few years before 1913 1913 is where it was actually created. I think this this bank panic happened in 1907 when many banks simultaneously experience bank runs. So now all the banks are having the same problem where everyone's trying to deposit at the same time, everyone thinks it's gonna crash and they're trying to get their money out of the bank. Okay, So the Fed was created in response to this. And let's go ahead and talk about the organization of the Fed in this video. So there's going to be a lot of numbers, a lot of details about the Fed. And then we're going to discuss the role of the Fed what it does and why it exists. Okay, so the organization of the Fed. First thing is the board of Governors. This is the highest body on the in the Fed and there's seven members in in the board of Governors and they're appointed by the President, the President of the USA. Right, So the President of the USA uh is going to appoint these seven members and they're confirmed by the Senate. These governors are gonna serve 14 year terms. So 14 year terms for the governors. And this board is the central authority of the Fed. So the most important person in the board is the chairperson of the board and they're the leader of the board of governors. So the chairperson serves a four year term and they may be reappointed by as the chairperson by the president. The president may reappoint them. And as of the filming, just so you know, this is this is generally a quick multiple choice question. They'll say who is the chairperson of the board? What at the point I filmed this video, the chairperson was Janet Yellen. Okay, but I want you to double check because if the chairperson at the point that I filmed this, they were actually already thinking about changing who the chairperson was. So definitely double check, you can even do a quick google search and just type chairperson of the Fed and just see who the current chairperson is. Alright, so just double check that and the rest of the organization here is there's two more things, there's going to be the Federal Reserve Banks. So we have the board of governors that is the overseen board and then there's gonna be banks which are regional around the United States and there's 12 different regional banks of the Fed and they're located in major cities throughout the country. Each Federal bank has its own board of directors and its own president. Okay, So, well, the most important part of the Fed that we're gonna be focusing on is this federal Open market Committee. So this federal open market committee, they're the ones that make decisions to increase or decrease the money supply. Okay, The money supply in the US. Okay. And we're gonna we're gonna talk more how they make those decisions and how they're gonna affect the money supply. But this is composed of all the members of the board of governors. So seven members, right? There's seven members in the board of governors and five of the regional bank presidents. And these five who are in the regional bank presidents are going to rotate throughout the different meetings throughout different uh over time, it's going to rotate which ones are included. Okay, so there's 12 total uh people in the in the federal Open Market Committee being seven from the board of directors or board of governors and five of the regional bank presidents. So they meet approximately every six weeks to discuss monetary policy. We're gonna be getting into a lot more about monetary policy in the upcoming videos. Alright, so it's paused here real quick and we'll discuss the role of the Fed why the Fed exists in the next

Alright. So the Fed has two main roles in our financial system. First is that they're gonna regulate banks and ensure the health of the banking system. They want to make sure everything is running smoothly. And second is controlling the quantity of money, right? The quantity of money available, the money supply in the economy. Okay. And that's gonna be through monetary policy. So let's start here with the first bullet point regulating banks. So this is carried out, excuse me, carried out mainly by the regional Federal Reserve banks where they're gonna be regulating the banks in their region. And the Fed is considered the lender of last resort. Okay. This is a key feature of the Fed is if things are going south, well, the Fed is expected to be able to make loans to these banks to make sure that they don't go under right there. The lender of last resort. And then we've got three different um definitions of loans that we're gonna be dealing with in the upcoming topics. We're gonna be dealing with discount loans. So these are loans made by the Fed to banks. So discount loans are by the Fed to banks. So banks go to the Fed and get a loan from the bank and they're gonna be at the discount rate. So the discount loans are at the discount rate, so it's the interest rate on discount loans, but we also have this other type of loan called the federal funds rate and this is the interest rate banks give to other banks on overnight loans. So sometimes a bank might need some money to meet their reserve requirements or something. Maybe uh you know, their their reserves are a little low. So they might borrow some money from another bank overnight just to fill in the gaps there. Um And that would be done at the federal funds rate. So you can imagine this discount loan is lowest rate and this is just above it, Just above discount. Okay. So these are loans made from the Fed are going to be the lowest possible rate. And then the federal funds rate is gonna be just above the discount rate from one bank to the other bank on a short term basis. Okay. So the second role that we're gonna be focused on a lot in this class is monetary policy. Okay, this is monetary policy and we're gonna go into a lot of details about this in future. Videos. So this is controlling the quantity of money, the money supply in the economy using monetary policy. And this is carried out by the F. O. M. C. That Federal Open Market Committee. And they're gonna use open market operations, which is what we're gonna focus on. Mostly they can uh change the discount policy which is the discount rate and they can adjust reserve requirements. So this is the reserve ratio required reserves, right? The reserve ratio. So they can affect any of these and open market operations. Uh This is the one we're gonna be focusing on the most, is buying and selling, uh, securities. Okay. So they're going to buy and sell securities to to control the amount of money available in the public. All right. So we'll get into that a lot more in future videos. But this is the role why we have the Fed here in the U. S. Cool. Alright, let's go ahead and pause and move on.