THE FED AND CONTROL OF THE MONEY SUPPLY

Structure of the District banks

12 Districts (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco)

Structure of the FOMC

12 members (7 from the Board of Governors other 5 are heads of Federal Reserve Banks [1 year terms] [NY President serves continuously]) FOMC is specifically in charge of open market operations

Why does the Fed's balance sheet matter?

Changes in bank reserves and money supply Changes in interest rates and asset prices Shows assets and liabilities S&D of bank reserves -> Fed funds rate (controls supply thru control of balance sheet items)

Explain how a Fed open market purchase increases reserves and the money supply showing each step (Arrow)

Deposits money in a bank and holds some as reserves but LOANS out to other banks. M1 goes up from the deposited loan at the other bank. Fed purchase increases deposits, loans and more deposits, multiple expansion initiated by Fed OMP -> MB (reserves) up -> Ms up -> i down -> I up -> D up -> y,p up

What the reasons, basis, and controversy over the Fed's independence

Fear of concentration of power Avoid Blame Recognize it's own shortcomings - inflation bias Better outcomes (less inflation with same unemployment) More transparency

Compare the Fed to the ECB

Governing Council 18 members vs. FOMC 12 members Price stability vs. stable prices, max employment, and moderate long-term interest rates Both politically independent

What are the monetary base and the monetary base multiplier?

Monetary base (total amount of currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves) = Money supply / base multiplier Monetary base multiplier = (1 + C/D) / (RR/D + ER/D + RCB/D + C/D)

How has the Fed expanded its balance sheet in 2007 and beyond

More securities, more currency, more reverse repos

Structure of the System Open Market Account

One of the monetary policy tools used by the United States' Federal Reserve System that contains assets acquired by open market operations

What are some key items on the asset side of the Fed's balance sheet? The liability side?

Securities and loans

Structure of the Board of Governors

Seven members appointed by the president and confirmed by the senate. Analyze domestic and international economic developments, supervises, and regulates the operations of the Federal Reserve Banks, has responsibility for Americas payments system, and oversees and administers most consumer credit protection laws

What determines the effective fed funds rate?

The Fed controls MB and thus fed funds rate

What is the Fed?

The central bank of the US. Regulates the US monetary and financial system