Ch 4
How long is the term for a governor on the board of governors of the Federal Reserve Board?
- 14 years - non renewable to present too much influence from politicians - many step down before the end of their term
FOMC Membership break down
- 7 members of board of governors - President of the Fed Reserve Bank of New York - 4 Presidents of other Fed Reserve Banks on a Rotating Basis
FOMC Goals
- Dual Mandate - unemployment below 4% - inflation target of 2%
Alan Greenspan
- Fed Chair (1987-2006) - longest-serving, expanding economy, generally stable rates - targeted interest rates
Ben Bernanke
- Fed Chair (2006-2014) - financial Crisis pushed rates to 0 - expert in Great Depression, guided his actions during the great recession
Paul Volker
- Fed Chair from (1979-1987) - used interest rates to fight inflation - targeted quantity of funds rather than rates
Janet Yellen
- Fed Chairman (2014-2018) - Big Decision: when to raise rates? - first female fed chair
Jerome Powell
- Fed Chairman (2018-Present) - Charting new path post-crisis - Dealt with COVID
Target Quantity
- Fed policy (pre-1993) - target quantity of reserved in the market - allows the interest rate to fluctuate - borrowers do not like fluctuating rates -> hard to plan, prefer fixes rates
Primary Responsibilities of FOMC 1) Conduct Monetary Policy
- Formulate monetary policies to promote full employment, economic growth, price stability, and sustainable pattern of international trade
Federal Open Market Committee (FOMC)
- The major monetary policy-making body of the Federal Reserve System. - 12 members - typically has 8 meeting annually
The Federal Reserve Balance Sheet: Assets
- US treasury securities - US Gov't agency securities - Loans to Domestic Banks - Misc. Assets (From financial Crisis) - Other
Primary Responsibilities of the board of Governors 3) maintain stability of financial system
- approve new programs during crises - authorize lender of last resort activities
The Federal Reserve Balance Sheet: Liabilities
- currency outside banks - depository institution reserves (reserves held by commercial banks at their banks)
Target Interest Rates
- current Fed policy is to target FFR - allows quantity to fluctuate
Why is zero unemployment not a good goal
- due to natural turnover - labor market participation - people who are working but are qualified for a better job (underemployed)
two building blocks of monetary policy
- federal reserve balance sheet - federal funds rate
Federal Reserve Bank Function 4) Provide payment and other financial services
- government services - new currency issue - check clearing - wire transfer services
Why is zero inflation not a good goal
- protection against deflation and to smooth labor markets - path of inflation - various measures -transitory issues (oil prices)
a little bit of inflation helps companies
- smooth labor markets - easier to adjust employees wages
Special Responsibilities of the board chair on the board of governors of the Federal Reserve Board?
- spokesperson - reports to congress - advisor to President - oversees staff - sets agenda
Federal Reserve Bank Function 2) Supervise and regulate
- supervision and regulation - consumer protection and community affairs (implement federal laws)
The Federal Reserve System
- the central bank of the United States - bank for commercial banks - founded in 1913
3 main components of the Fed Reserve Systems
1) 12 Federal Reserve Banks (nationally) 2) 7 member board of governors (meet in DC) 3) 12 member federal open market committee (FOMC) (Presidents of reserve banks and board of governors)
4 major functions of the Fed
1) Conduct Monetary Policy 2) supervise and regulate depository institutions 3) maintain stability of financial system 4) Provide payment and other financial services
OMO example steps
1) FRB buys securities from Dealer 2) Dealer deposits cash in banks 3) Bank sends cash to Federal Reserve as Excess Reserves
The Fed funds rate is a function of
1) Supply and demand for federal funds among banks 2) effects of the Fed's trading through the FOMC
Limitations of Traditional monetary policy: What doesn't the Federal Reserve have Control Over
1) bank lending decisions (bank can hold excess reserves) 2) Cash holdings/demands of consumers 3) the level of deposits in bank 4) decisions by businesses to invest (demand curve)
Three main monetary policy tools
1) open market operations 2) discount rate 3) reserve requirements
Two basic Approaches to monetary policy
1) target interest rates 2) target quantity
Term of Board Chairs on the board of governors of the Federal Reserve Board?
4 years - nonpolitical
A1
Bston
Excess Reserves/Cash =
Deposits - Reserves/Cash-Loans
Reserves/Cash =
Deposits*Reserve Ratio
Who appoints the President of their Federal Reserve Bank
Directors
Loans =
Excess Reserves + Loans
T/F the Fed can directly set the federal funds
F the Fed can only target and influence the federal funds rate it cannot directly set the rate
We can use the Feds balance sheet to see
Fed's monetary policy actions over time
What question does the change in bank deposits formula answer?
How much money does the money supply (bank deposits) increase?
Why doesn't the Fed just expand the money supply
INFLATION
Why doesn't the Fed just keep increasing the money supply to keep people employed
INFLATION
interest on excess reserves (IOER)
Interest rate paid by the Federal Reserve on bank excess reserves.
What is an overarching goal of the federal reserve?
Keeping spending in line with production
B2
New York
Do governors dissent from chair's position?
Not traditionally unless they strongly disagree
It is important to keep spending in line with....
PRODUCTION
When and where fo the governors on the board of governors of the Federal Reserve Board?
Several times a week in DC
Increasing the discount rate
alters the cost of borrowing to allow banks to lend less
Lowering the discount rate
alters the cost of borrowing to allow banks to lend more
The Federal Reserve bank of New York
always has a voting member on the FOMC because monetary policy decisions involve trading securities which are traded the the Fed Reserve Bank of New York
change in bank deposits formula can be used for
any monetary policy tool that affects excess reserves - OMOs, Bank Borrowing from discount rate changes, Reserve Requirements
how do the fed reserve banks operate
as non-profit organizations
Federal Reserve Bank Function 1) Conduct Monetary Policy
assistance in the conduct of monetary policy - operate discount window - serve on FOMC
OMOs are the primary determinant of changes in
bank excess reserves in the banking system and this impact the size of the money supply and/or the level of interest rates
Three ways a non-financial firm can get cash
bank loan, IPO, asset sale
What does increasing the money supply encourage
borrowing by firms and spurs hiring and economic growth
Excess reserves
can be lent to other banks at the FFR - focal point for monetary policy
money supply
cash and checking accounts suitable as a medium of exchange (M1)
Maintain the stability of the financial system
contain systemic risk that may arise in financial markets - lender of last resort
The discount rate directly alters
cost of borrowing for banks
The direct affect of increasing the reserve ratio is to
decrease the availability of funds banks can lend
What does the sale of securities by the Fed do to the supply of bank reserves?
decreases supply of bank reserves
The non-financial businesses control the ____ curve
demand
Need business people in the board of directors because
demand curves are set by non-financial business and can bring input
deposits =
deposits + reserves
Decisions of the Fed
do not have to be ratified by congress but are subject to oversight by U.S. Congress
Supervise and regulate depository institutions
ensures the safety and soundness of nations banking and financial system and to protect the credit rights of consumers - prevents crisis in economy
By law the governors appointed on the board of governors of the Federal Reserve Board must yield
fair representation of financial, agricultural, industrial, and commercial interest and geographical divisions of the country
provide payment and other financial services
for depository institutions, US govt, and foreign official institutions
Primary Responsibilities of the board of Governors 1) Conduct Monetary Policy
formulation and conduct of monetary policy
OMOs are traded
in the US treasury securities market, an OTC where traders are electronically linked
Change in bank deposits =
increase in reserves/ new reserve requirements
The direct affect of lowering the reserve ratio is to
increase the availability of funds banks can lend
What does the purchases of securities by the Fed do to the supply of bank reserves?
increases supply of bank reserves
Conduct monetary policy
influence the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
The federal Reserve monetary policy targets the federal funds rate with the goal of
influencing the money supply
for money supply to increase banks need to
inject more money into the economy by making a loan or buying assets
required reserves
must be held in deposits at the FRB or cash in the vault - % of the bank's deposits - to ensure banks always have enough to give money to depositors
during normal times, why are banks reluctant to borrow from the Fed?
negative stigma of using "lender of last resort"
Primary Responsibilities of the board of Governors 4) Provide payment and other financial sevrices
none
Reserve Requirements (RR)
portion of reserves the Fed requires banks to hold to bank transaction deposit accounts
Repurchase Agreements (Repos) - Expansionary
provide banks with cash in return for T-Bills
open market operations (OMOs)
purchases and sales of securities in the US treasury securities market by the federal reserve
Reverse Repos (contractionary)
remove cash from banks (FIs) and replace it with T-bills
Federal Reserve Bank Function 3) maintain stability of financial system
research services
What does the IOER do?
sets a floor for the FFR (discourages banks from lending below a rate
Primary Responsibilities of the board of Governors 2) Supervise and regulate
supervision and regulation for all bank holding companies
The Fed only controls the ____ curve
supply
What do the 3 main components of the Fed reserve system do?
support the four main functions of the fed
monetary policy
the actions the Federal Reserve takes influence the availability and cost of money and credit to promote national economic goals
federal funds rate
the interest rate at which banks make overnight loans to one another
Who appoints the board of governors of the Federal Reserve Board?
the president --> confirmed by the senate
The Discount Rate
the rate of interest the Federal Reserve charges for lending reserves to private banks in their district
No two governors on the board of governors of the Federal Reserve Board can come from
the same Federal Reserve District
dual mandate
the twin responsibilities of the Federal Reserve, to use monetary policy to ensure price stability and maintain full employment
Governance Class B Directors
three business people elected by member banks in the district
Governance Class C Directors
three people appointed by the Federal Reserve Board of Governors
Governance Class A Directors
three professional bankers elected by member banks of the district
When is discount rate used?
when the Fed want's to send a strong message to financial markets
