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The Federal Reserve. Vincent Reitano October 25 th 2010. Outline & Methodology . Introduction to Federal Reserve. Real World Impact of Fed. General definitions: Central Bank & MP History and organization of Fed Federal Funds Rate Policy Implementation New policies (QE, TALF).

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the federal reserve

The Federal Reserve

Vincent Reitano

October 25th 2010

outline methodology
Outline & Methodology

Introduction to Federal Reserve

Real World Impact of Fed

  • General definitions: Central Bank & MP
  • History and organization of Fed
  • Federal Funds Rate
  • Policy Implementation
  • New policies (QE, TALF)
  • Modeling the US economy through indicators and economic identities
    • Quantitative view of GDP
    • AD/AS Model, graphs
  • Impact of Fed, Fiscal Policy
  • Financial Markets
definition role of fed
Definition & Role of Fed
  • The US Federal Reserve
      • “The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.”
    • Key Concepts: Central Bank & Monetary System
    • Domestic, international
u s economic history
U.S. Economic History

19th-20th Century: Economic issues

1907 Panic

Creation of Federal Reserve

19 th 20 th century bank panics
19th-20th Century Bank Panics


-Instability in financial markets

-Lack of bank reserves


-Lack of Regulation

national monetary commission
National Monetary Commission
  • Panic of 1907
  • Variables, Influences
    • JP Morgan
  • Congress, Nelson Aldrich
the federal reserve act of 1913
The Federal Reserve Act of 1913
  • Signed by President Wilson December 23, 1913 with changes/amendments
    • Finally fulfilled Alexander Hamilton’s dream
  • Created Central Bank & Regional Banks
  • Specific language used in act:
    • Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.
modern fed policy controversy
Modern Fed Policy: Controversy

“Fed Speak”

  • Paul Volcker: 1979-1987; 2008-Current
    • Stagflation
    • Associated Federal Funds Rate increases
  • Alan Greenspan: 1987-2006
    • Lost PhD paper on housing bubbles
    • Reactions to historical events
organization of the fed
Organization of the Fed
  • Board of Governors
    • 7 Members, Chairman and Vice-chairman
    • Recent Chairmen….
  • Federal Open Market Committee (FOMC)
    • Board of Governors + 5/12 Regional Fed Presidents
  • Regional Banks
role of the fed
Role of the Fed

1. Banking system regulation

  • Fractional-Reserve Banking
    • Reserve Ratio, Money creation, Multiplier Example
  • “Lender of last resort”

2. Money Supply

  • M1, M2, M3, MZM
  • Liquidity of money and other assets
  • Fisher Effect: Nominal  Real
    • (1+r)*(1+h)=(1+R)
federal funds rate
Federal Funds Rate

Interbank loan rate

Basis Points

Greenspan Predictions!

policy tools
Policy Tools
  • Open Market Operations
    • Sale of bonds: taking money out of the economy
    • Purchase of bonds: put money into the economy
      • Logically, this implies….
  • Discount Rate
    • Inverse relationship between rate and lending
  • Reserve Requirements
    • Cash or Fed Reserves
modern policy tools
Modern Policy Tools
  • What the textbooks will not tell you…
  • 1. Quantitative Easing (QE)
  • 2. Term Asset Backed Securities Loan Facilities
    • Effectiveness of these policies
building a model
Building a Model
  • GDP=Y=C+I+G+NX
    • Income Expenditure Identity (a)
    • What does each variable represent?
  • Total Production=Total Income=Total Expenditure
    • Fundamental Identity of National Income Accounting (b)
    • Y=Y=Y?
almost there
Almost there…
  • Spvt+Sgovt=Y+NFP-C-G
    • Derived from substitution of both formulas;
    • Input Identity (a)
    • Economic fact that NX+NFP=CA
finally finished
Finally finished…


ad as model
AD/AS Model

Y=AF(K,N); derivative of AD=MPK; shifts

what about fiscal policy
What about Fiscal Policy…?
  • Expansion vs. Contraction
    • Taxes and spending/stimulus
  • Business Cycles
  • How Monetary Policy & Fiscal Policy interact
side note econ politics media
Side Note: Econ, Politics & Media

Classical vs. Keynesian economics

Economic Theory/Conjecture vs. Fact

Democrat vs. Republican

Media: The sky is falling everyday

the fed is awesome where do i look for current information
The Fed is awesome! Where do I look for current information?
  • FRB Website
  • FRB email updates
  • St. Louis Bank FRED
  • Beige Book
  • BLS, BEA
  • Great external sites: Seeking Alpha, blogs of economists
    • Connecting math and economics
works cited
Works Cited

Abel, Andrew B., Ben Bernanke, and Dean Darrell Croushore. Macroeconomics. Boston: Addison-Wesley, 2011. Print.

"Banking Panics in the US: 1873-1933 | Economic History Services." EH.Net | Economic History Services. Economic History Association. Web. 22 Oct. 2010. <>.

"The Federal Reserve System: Purposes & Functions." Board of Governors of the Federal Reserve System. Web. 15 Oct. 2010.

"Federal Reserve System." Wikipedia, the Free Encyclopedia. Web. 15 Oct. 2010. <>.

"The Founding of the Fed." Federal Reserve Bank of New York. Web. 20 Oct. 2010. <>.

"FRB: Term Asset-Backed Securities Loan Facility." Board of Governors of the Federal Reserve System. Web. 20 Oct. 2010. <>.

"FRB: Term Deposit Facility." Board of Governors of the Federal Reserve System. Web. 20 Oct. 2010. <>.

Greenspan, Alan. "The Delphic Future." The Age of Turbulence: Adventures in a New World. New ed. New York: Penguin, 2007. Print.

Mankiw, N. Gregory. Principles of Macroeconomics. 4th ed. Mason, OH: Thomson South-Western, 2007. Print.

"Panic of 1907." Wikipedia, the Free Encyclopedia. Web. 15 Oct. 2010. <>.

Statute, By. "FRB: Reserve Requirements." Board of Governors of the Federal Reserve System. Web. 15 Oct. 2010. <>.

Thomas, Mark. "Central Bank Independence and Inflation." Economist\'s View. 20 Nov. 2005. Web. 21 Oct. 2010. <>.