Ch 4

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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


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