Transcript CHAPTER 4

CHAPTER 4
THE FEDERAL RESERVE SYSTEM
GOALS OF MONETARY POLICY
POLICY ROLES AND POLICY TOOLS
Dr. David P. Echevarria
All Rights Reserved
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INTERESTING FACTS
A. Federal Reserve Act passed in 1913
1. Largely in response to Panic of 1907
2. John Pierpont Morgan was major supporter
B. Income earned from interest received
from investments in government
securities
C. Member banks must buy stock in the
district bank. Stock pays a maximum
dividend of 6%
Dr. David P. Echevarria
All Rights Reserved
2
THE FEDERAL RESERVE SYSTEM
A. Structure of the Federal Reserve
1. Board of Governors (7 members). Appointed
for 14 year terms (2 yr. rotations).
a. Chairman (appointed by U.S. President - 4 years)
2. 12 District banks; NY is largest. 25 branches.
Boston (A), NYC (B), Philadelphia (C), Cleveland
(D), Richmond (E), Atlanta (F), Chicago (G), St
Louis (H), Minneapolis (I), KC (J), Dallas (K), San
Francisco (L) (See Exhibit 4.1, page 75)
Dr. David P. Echevarria
All Rights Reserved
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THE FEDERAL RESERVE SYSTEM
3. Member banks; All commercial banks
chartered by OCC are members.
Many state charted banks are also members.
4. Federal Open Market Committee
a. The policy making body
b. Voting members: Board of Governors and 5
presidents from the 12 banks (12). President of
NY Fed is always a member.
Dr. David P. Echevarria
All Rights Reserved
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GOALS OF MONETARY
POLICY
A. Stable prices
1.
2.
Inflation measures: Consumer Price Index (CPI)
Inflation drives values of financial assets down, real
assets up.
B. Full employment
1.
Supply of credit and capital (currency)
C. Funding economic growth
1.
2.
Assure financial market stability
Liquidity supplier of last resort (Bear Stearns,
others)
Dr. David P. Echevarria
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GOALS OF MONETARY
POLICY
D. Supervisory powers over member banks
1.
2.
3.
Auditing and Compliance
Chartering and Capital Requirements
Reserve Requirements (1980: DIDMCA)
Type of liability
Percent of
Liabilities
Net transaction accounts (7-days)
Effective date
$0 to $10.3 million2
0
1/1/2009
More than $10.3 million to $44.4 million3
3
1/1/2009
More than $44.4 million
10
1/1/2009
Nonpersonal time deposits
0
12/27/1990
Eurocurrency liabilities
0
12/27/1990
Dr. David P. Echevarria
All Rights Reserved
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MONETARY POLICY;
CONTROLLING SUPPLY OF MONEY
A. Reserve requirements for deposit liabilities
B. Open market operations
1.
2.
3.
Buying government securities by the Fed
Selling government securities by the Fed
Discount rate: cost of borrowing from the Fed
C. Margin Requirements for Security Markets
D. Impact on Firms of Monetary and Fiscal Policy
1.
2.
M.P. affects the cost of [new] capital. Affects expansion plans.
Fiscal Policy; create Government demand for capital goods.
Dr. David P. Echevarria
All Rights Reserved
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CHANGES IN MONETARY BASE:
IMPACT ON CREDIT
A.
B.
C.
D.
E.
Cash deposits create new excess reserves.
Excess reserves loaned out and new deposits created.
New deposits permit creation of new loans.
The process continues until the last deposit (less
Required Reserves.) too small to lend.
What happens when Cash is withdrawn? Reserves
depleted, leading to...
1.
2.
3.
Multiple contraction in sources of reserves
Banks resort to borrowing in the federal funds market or
Borrowing from the Federal Reserve (discount window)
Dr. David P. Echevarria
All Rights Reserved
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GLOBAL RESPONSIBILITIES OF
THE "FED"
A. As nation's central bank, responsible for
coordinating policy with other CBs
B. Foreign Bank Supervision Enhancement Act
(1991);
1.
2.
Fed oversight of foreign banks operating in US
Approve entry of foreign banks to operate in US
C. Basel Accords (See Chapter 18)
1.
Capital Adequacy and Risk Management
Dr. David P. Echevarria
All Rights Reserved
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HOMEWORK QUESTIONS
A.
B.
C.
D.
E.
F.
G.
What are the principal objectives of the Federal
Reserve System?
How is the Federal Reserve organized?
What is the function of the board of Governors?
What is the function of the Federal Open Market
Committee (FOMC)?
What are the goals of Monetary Policy? Fiscal Policy?
How do changes in Monetary Policy affect business?
How does they Fed increase (decrease) the monetary
base?
Dr. David P. Echevarria
All Rights Reserved
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