Chapter 6 The Monetary System

Definition of central bank: An institution designed to oversee the banking system and regulate the quantity of money in the economy.

Definition of Federal Reserve (Fed): the central bank of the United States.

Watch a video: What is the Fed? 观看下方视频：美联储如何运作

After watching this video, you need determine: 请带着以下这4个问题看视频，边看边思考。

(1) When was the Fed created? 

(2) For what purpose the Fed was being introduced? 

(3) What is the Fed’s basic structure?

(4) Who owns the Fed?

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The Federal Reserve was created in 1913 after a series of bank failures in 1907 when the U.S. needed a central bank to ensure the health of the nation’s banking system.

The Fed's Organization

The Fed is run by a Board of Governors with 7 members who serve 14-year terms. The Board of Governors has a chairman who is appointed for a four-year term. The current chairman is Jerome H. Powell.

The Federal Reserve System is made up of Federal Reserve Board in Washington, D.C. and 12 regional Federal Reserve Banks located in major cities around the country.

The central bank in China is the People's Bank of China (PBC or PBOC) established on December 1st, 1948. The purpose of PBC is to carry out monetary policy and regulate financial institutions in mainland China. The current governer of PBC is Yi Gang, who has been in this position since 2018.

The Fed has two jobs. 

One job performed by the Fed is the regulation of banks to ensure the health of the nation’s banking system. This duty is primarily the responsibility of the 12 regional banks.

The Fed monitors each bank's financial condition and facilitates bank transactions by clearing checks.

The Fed also makes loans to banks when they want (or need) to borrow, acts as a bank's bank, the lender of last resort.

The second job of the Fed is to control the money supply, which refers to the quantity of money available in the economy,through the monetary policy.

Monetary policy is used by policymakers in central bank to control the growth of money supply.

In U.S., monetary policy is made by Federal Open Market Committee.

The Federal Open Market Committee (FOMC) consists of the 7 members of the Board of Governors and 5 of the 12 regional Federal Reserve District Bank presidents.

They meet about every six weeks in Washington, D.C., discuss the condition of the economy, and consider changes in monetary policy. 

Through the decisions of the FOMC, the Fed can change the money supply. The primary way in which the Fed increases or decreases the money supply is through open market operations (which involve the purchase or sale of U.S. government bonds).

If the Fed wants to increase the supply of money, it creates dollars and uses them to purchase government bonds from the public through the nation's bond markets, known as "Open-market purchase" .

If the Fed wants to lower the supply of money, it sells government bonds to the public. Money is then taken out of the hands of the public and thus the supply of money falls, known as "Open-market sale".

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