Chapter 13 Questions

Why is he New York Federal Reserve always a voting member of the FOMC (Federal Open Market Committee)?

-The New York Fed plays an extremely important role in the functioning of the Federal Reserve and monetary policy. -Its district contains many of the largest commercial banks in the country, has regulatory authority over bank holding companies, and is very close to most financial market operations, so the New York Fed can maintain close monitoring of how the economy and financial markets are operating. -In addition, the open market desk is housed at the New York Fed, which is tasked with executing the directives of monetary policy open market operations. In this capacity, the New York Fed interfaces directly with bond and foreign exchange dealers. -In addition, it is a member of the Bank for International Settlements, and houses the largest gold deposit in the United States. For these reasons, the New York Fed is extremely important, and is always given a vote at FOMC deliberations.

What is the primary rationale for appointing Governors to 14-year terms? How does this rationale relate to the political business cycle?

-The primary rationale for appointing Governors to 14-year nonrenewable 14-year terms is to limit the President of the United States control over the Fed and insulate the Fed from other political pressures. This allows the Fed to focus on long term objectives versus short-term politically motivated objectives. -The "political business cycle" refers to the political process in the United States in which just before an election, expansionary policies are pursued to lower unemployment and interest rates. If the Fed Governor's were not shielded from these cycles they could be pushed into expansionary monetary policies against their better judgment.

Why was the Federal Reserve System set up with twelve regional Federal Reserve banks rather than one central bank, as in other countries?

Because of traditional American hostility to a central bank and centralized authority, the system of 12 regional banks was set up to diffuse power along regional lines.

Why might eliminating the Fed's independence lead to a more pronounced political business cycle?

Eliminating the Fed's independence might make it more shortsighted and subject to political influence. Thus, when political gains could be achieved by expansionary policy before an election, the Fed might be more likely to engage in this activity. As a result, more pronounced political business cycles might result.

Do you think that the fourteen-year nonrenewable terms for the governors effectively insulate the Board of Governors from political pressure?

The 14-year terms do not completely insulate the governors from political influence. The governors know that their bureaucratic power can be reined in by congressional legislation and so must still curry favor with both Congress and the president. Moreover, in order to gain additional power to regulate the financial system, the governors need the support of Congress and the president to pass favorable legislation.

What positions in the Federal Reserve System comprise the Federal Open Market Committee (FOMC)?

The Federal Open Market Committee is comprised of the 7 members of the Board of Governors plus presidents of the Federal Reserve Bank (FRB) of New York and four other FRBs. New is a permanent member and the four other FRB presidents are rotated through the other 11 FRB presidents.

In what ways can the regional Federal Reserve Banks influence the conduct of monetary policy?

The Federal Reserve Banks influence the conduct of monetary policy through their administration of the discount facilities at each bank and by having five of their presidents sit on the FOMC, the main policymaking arm of the Fed.

What is the primary tool that Congress uses to exercise control of over the Fed?

The threat that Congress will acquire greater control over the Fed's finances and budget.

Why is it important for the regional Federal Reserve bank presidents to attend the FOMC (Federal Open Market Committee) meeting, even if they are nonvoting members?

This is important since, even if they are currently non-voting members, it gives them an opportunity to provide information on the health of the economy in their region, which could be quite different from other regions, giving important context to any policy decision.

How does the Federal Reserve Bank of New York occupy a unique position among the twelve regional Federal Reserve Banks?

• FRB of New York has many of the largest commercial banks in the United States, the safety and soundness of which are paramount to the health of the US financial system • FRB of New York has active involvement in the bond and foreign exchange markets. The New York Fed houses the open market desk, which conducts open market operations (the purchase and sale of bonds) • FRB of New York is he only Federal Reserve bank to be a member of the Bank of International Settlements (BIS). Thus the president of the New York Fed, along with the chairman of the Board of Governors, represents the Federal Reserve System in its regular monthly meetings with other major central bankers at the BIS. • The president of the FRB of New York is the only permanent voting member of the FOMC amount the Federal Reserve bank presidents, serving as the vice-chairman of the committee.

Who are the seven current members of the Board of Governors of the Federal Reserve System?

-Janet L. Yellen, Chair -Stanley Fischer, Vice Chairman -Daniel K. Tarullo -Jerome H. Powell -Lael Brainard