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The Federal Reserve. Richard Slevinsky 4/7/03. Outline. History Organization & Functions Policies & Concerns. U.S. Bank History. First Bank of United States Est. after birth of U.S. (1791) Second Bank of U.S. (Est. 1816) Charters of both not renewed by President Jackson (1836)

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The federal reserve

The Federal Reserve

Richard Slevinsky

4/7/03


Outline
Outline

  • History

  • Organization & Functions

  • Policies & Concerns


U s bank history
U.S. Bank History

  • First Bank of United States

    • Est. after birth of U.S. (1791)

    • Second Bank of U.S. (Est. 1816)

    • Charters of both not renewed by President Jackson (1836)

  • De-centralized banking from 1836-1863

    • 1,400 bank institutions, up to 1,600 note types

    • Inefficient, subject to counterfeiting


Move toward centralization
Move Toward Centralization

  • Civil War: National Currency Act (1863)

    • Reserves maintained / notes redeemed at principal locations (main cites)

    • Allowed for chartering of national banks

  • Panic of 1907

    • 2nd and 3rd largest banks in country closed

    • Depositors withdrew funds (run on banks)

    • JP Morgan et al., backed remaining banks to restore depositor faith


Reform
Reform

  • Bankers realized reform needed. Washington not easily convinced

  • Aldrich-Vreeland Act

    • Est. commission to study banking systems and adapt changes if applicable.

  • Aldrich Plan

    • Contained several ideas of Federal Reserve

    • Lack of central authority

    • Uniform discount rate


Federal reserve established
Federal Reserve Established

  • Created by Federal Reserve Act, 1913

  • Purposes:

    • To provide the country with an elastic currency

    • Centralize bank reserves

    • Provide multi-regional check / currency clearing system, to reflect country’s regions and growth

    • Provide banking facilities for the federal government


Organization of the fed
Organization of the “Fed”

  • Main components of the Federal Reserve

    • Federal Reserve Board of Governors

    • Federal Reserve Banks

    • Federal Open Market Committee (FOMC)


Board of governors
Board of Governors

  • Seven member Federal Reserve Board

    • 14-year terms

      • One new term begins every two years

        (on 2/1, even-numbered years)

      • Member who serves a full-term cannot be appointed again

      • A member finishing out another’s term may be reappointed.

    • Nominated by President, confirmed by Senate

  • Federal Reserve Board has a Chairman and Vice-Chairman

    • Both nominated by President, confirmed by Senate.

    • Serve 4-year terms


Today s members
Today’s Members

  • Chairman: Alan Greenspan

  • Vice-Chairman: Robert W. Ferguson, Jr.

  • Other members:

    • Edward M. Gramlich

    • Susan Schmidt Bies

    • Mark W. Olson

    • Ben S. Bernacke

    • Donald L. Kohn


Federal reserve banks
Federal Reserve Banks

  • 12 regional reserve banks

    • Each bank with own 9-member board of directors

      • One person from each bank’s board selected for the Federal Advisory Board, meeting in Washington 4 times a year.

  • Responsibilities

    • Distribution of currency (paper and coin)

    • Supervise Banks

    • Dept. of Treasury functions



FOMC

  • Composed of the 7-member Board of Governors and 5 Reserve Bank presidents

    • Reserve Bank of NY is always a member

    • Other FRB presidents serve one-year terms

  • Implements national monetary policy

    • Determines the Fed’s open-market transactions

  • Determines holdings of foreign currencies


Policies
Policies

  • The Federal Reserve has three main tools to execute its monetary policy

    • Open market operations – the purchase and sale of government securities

    • Reserve requirements – the required cash reserve a financial institution must keep at the Fed

    • The discount rate – rate at which the Fed lends funds to banks


Open market operations
Open Market Operations

  • The Fed controls bank reserves by buying/selling U.S. Treasury and federal securities

    • Controls money supply

    • Effects banks’ lending capacity, and rates

    • Buying from a bank increases that banks’ lending capacity  increases money supply

    • By selling securities, the Fed effectively re-acquires what it issued before  reduces money supply

    • Bank interest rates can be controlled for short periods of time in this way


Reserve requirements
Reserve requirements

  • Seldom used by Fed to control bank reserves

  • Small change in requirements translates to massive changes in the dollar reserve requirement

  • Banks are obligated to deposit in the Fed a specified percentage of its liabilities


Discount rate
Discount Rate

  • Interest rate charged to banks on loans they receive from Federal Reserve Bank

    • Lending facility called discount window

  • 3 types of loans

    • Primary: loaned to stable institutions

    • Secondary: liquidity needs, financial difficulties

    • Seasonal: Repeating intra-year fluctuations, loaned to agricultural banks, seasonal resort lenders.



Other fed roles
Other Fed roles

  • Fight inflation

    • Discipline monetary growth and credit growth

      • Through interest rates

    • Monitor Gross National Product (GNP) and

    • Unemployment

  • Debt

    • Check Congressional spending/income

    • Trade deficits

    • Strength of dollar

    • Fed is more flexible than Congress


Other fed roles1
Other Fed roles

  • Check GNP growth

    • If falling below 1%

      • Ease reserve constraints

      • Lower interest rates

      • Counter rising unemployment

    • If rising above 5%

      • Strengthen reserve constraints

      • Raise interest rates

      • Monitor inflation

    • Ideal: around 3%

      • Fed policies remain the same


Fed foreign currency
Fed & Foreign Currency

  • Aim – intervene in foreign currency markets when conditions not ideal

    • Intervention through NY foreign exchange markets.

  • If dollar falling – Fed purchases dollar (sells other currencies)

  • If dollar rising – Sale of dollar (for other currencies)


Swap network
Swap Network

  • Reciprocal short-term credit management between Fed and other foreign central banks

    • Fed can borrow currencies from foreign country for intervention operations

    • Works both ways


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