Federal Reserve System

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Federal Reserve System

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Shifts in demand and fluctuating interest rates. Targeting interest rates. Shifts in demand and reserves and money supply fluctuate ... – PowerPoint PPT presentation

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Title: Federal Reserve System


1
Federal Reserve System
Organization
Assets and Liabilities
Monetary Policy
Functions
2
Federal Reserve System
  • Central bank established in 1913
  • 12 Fed District Banks
  • Member Commercial Banks
  • 7 Members of Board of Governors
  • 14 year terms for Governors
  • 12 Open Market Committee (FOMC) Members
  • Advisory Committees to Fed from private sector

3
Member Banks
  • Must meet requirements of the Federal Reserve
    Board of Governors to be a member bank
  • Nationally chartered banks must be member banks
  • State chartered banks may be member banks
  • 35 of banks controlling 70 of all deposits are
    members

4
Functions of FRS
  • Monetary policy
  • Discount rate
  • Sale and purchase of government securities
  • Open market operations
  • Reserve requirements
  • Supervision and regulation
  • Government services
  • New currency issue
  • Check clearing
  • Wire transfer service
  • Research services

5
FR Influence on Economy
  • The Process

Liquidity, money supply, and Interest rates
Business and consumers borrowing/spending
Goals of growth, price stability, and job growth
6
Assets and Liabilities of FR
  • Liabilities of FR page 99
  • Monetary base Currency in circulation bank
    reserves at FR
  • Reserve deposits Required excess
  • Assets of FR
  • Gold, treasury securities, and loans to banks

7
Monetary Policy
  • Target the quantity of reserves
  • Or
  • Target the interest rates (since 1993 federal
    funds rate)

8
Tools
  • OMO
  • Buy securities to reduce bank reserves
  • Sell securities to increase bank reserves
  • Discount rate
  • Special needs lender of last resort
  • Adjustment credit seasonal credit, extended
    credit
  • Signaling effect
  • Reserve requirements

9
FR, Money Supply, and Interest Rates
  • Expansionary
    Contractionary
  • Reserves up
    down
  • Credit availability up down
  • Money supply up down
  • Interest rates down up
  • Security prices up
    down
  • The Process See Figure 4-5 on page 110

10
Targeting
  • Money Supply
  • Definitions Money base, M1,M2,M3, L, Deb
  • Targeting rates
  • Shifts in demand and fluctuating interest rates
  • Targeting interest rates
  • Shifts in demand and reserves and money supply
    fluctuate
  • Historical federal funds rate and money supply
    growth

11
Monetary Control Act of 1980
  • To regain more control over the money supply, all
    depository institutions must
  • Meet the same reserve requirements
  • Hold noninterest-bearing reserves
  • Promptly report deposit levels to the Fed
  • Other provision of the MCA allowed all depository
    institutions
  • To offer transaction accounts
  • Access to the discount window

12
Global Monetary Policy
  • Each country has its own central bank and often
    industrialized countries have banks with similar
    goals
  • Integration in the global economy means the Fed
    must consider conditions in other countries when
    looking at the U.S. economy
  • Central banks try to work together but conflicts
    of interest can make cooperation difficult at
    times

13
Global Monetary Policy
  • A single European monetary policy
  • Euro replaced national currencies of 11 countries
    in January 1999
  • National currencies withdrawn and replaced by
    euro by June 1, 2002
  • Countries of the 15 in the European Union needed
    to meet economic criteria and chose to join
  • Created a European Central Bank

14
International Aspects
  • Monetary policy and FX rates
  • FR buys domestic currency using foreign exchange
    as payment This results in a decrease in the
    U.S. money supply and an increase in the supply
    of the foreign currency. Thus, foreign currency
    depreciates in value relative to the U.S. dollar.
  • FR now holds FX and bank reserves at the FR go
    up.