The Federal Reserve System and Monetary Policy

Vocabulary flashcards for reviewing the Federal Reserve System and its monetary policy tools.

The Federal Reserve (The Fed)

The central bank of the United States, created in 1913 to ensure the health of the nation’s banking system and conduct monetary policy.

Monetary Policy

The setting of the money supply by the Federal Reserve.

Federal Reserve Banks

12 regional banks located in major cities around the country that monitor financial conditions, facilitate bank transactions, and act as a bank's bank.

Lender of Last Resort

A function of the Federal Reserve Banks, providing discount loans to banks.

Board of Governors

7 members with 14-year terms, appointed by the President and confirmed by the Senate, who direct the Fed staff and preside over board meetings.

Chairman of the Board of Governors

Appointed by the president (4-year term), directs the Fed staff, presides over board meetings, and testifies about Fed policy.

Federal Open Market Committee (FOMC)

Composed of the 7 members of the Board of Governors and 5 of the 12 regional bank presidents, meets to discuss macro-economic conditions and consider changes in monetary policy.

Discount Rate

The interest rate on loans that the Fed makes to banks.

Reserve Requirements

Government regulation on the minimum amount banks must hold in reserves.

Open Market Operations

The purchase and sale of U.S. government bonds by the Fed to influence the money supply.

Federal Funds Rate

The interest rate at which banks make overnight loans to one another.

Inflation Targeting

The Fed aims for an inflation rate of approximately 3% per year.