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Ch. 15

Ch. 15. Monetary Policy. Federal Reserve Bank. Purpose is to make deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy. “Fed” increases or decreases the money supply Increase = “easy” money policies

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Ch. 15

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  1. Ch. 15 Monetary Policy

  2. Federal Reserve Bank • Purpose is to make deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy. • “Fed” increases or decreases the money supply • Increase = “easy” money policies • Decrease = “tight” money policies

  3. Monetary Policy • Increase money supply lowers Federal Funds rate (recession) • Decrease money supply increases Federal Funds rate (inflation)

  4. History of the Federal Reserve System • Created in 1913 in response to the “Panic of 1907” • “bank run” at Knickerbocker Trust • Charles Barney asks for loan from J.P. Morgan

  5. Morgan’s rebuff leads to Barney’s suicide • Where does a bank go to borrow money? • Need for a “banker’s bank”

  6. 12 districts of the Federal Reserve

  7. Boston (A) • New York City (B) • Philadelphia (C) • Cleveland (D) • Richmond (E) • Atlanta (F) • Chicago (G) • St. Louis (H) • Minneapolis (I) • Kansas City (J) • Dallas (K) • San Francisco (L)

  8. Federal Reserve Headquarters-Washington, D.C.

  9. New York Federal Reserve

  10. Federal Reserve-Dallas

  11. Leadership of the Federal Reserve Ben Bernanke-Chairman (2020) Janet Yellen –Vice Chairman (2024)

  12. Members of the Board (5 total) • Elizabeth Duke (2012) • Daniel Tarullo (2022) • Sarah Bloom Raskin (2016) • Jerome Powell (2014) • Jeremy Stein (2018)

  13. Facts about Board of Governors • Only one appointee from an individual district • Chairman makes $199,700 • All other board members make $179,700 • Nominated by President and confirmed by Senate • Term begins February 1st on even numbered years • Serve for 14 years/Chairman and Vice-Chairman appointed every 4 years • Chairman and Vice-Chairman may serve total of 20 years • Alan Greenspan served from 1987-2007

  14. Each district has its own President... • New York Chairman always serves on the Federal Open Market Committee • All other Presidents serve on the FOMC on a rotating basis • NY Fed Chairman is William C. Dudley • He replaced Timothy Geithner

  15. Federal Reserve Regional Presidents • Appointed to 5 year terms by Board of Directors of Regional Bank (made up of bankers and community leaders) • Approved by Board of Governors • Term ends on the last day of February in years that end with 1 and 6, i.e. 2011 • Mandatory retirement at age 65 • If appointed after the age of 55, can serve until age 70 with board approval • Are NOT government employees

  16. Dallas Federal Reserve Board of Directors • Herb Kelleher(Chairman)Founder and Executive Chairman EmeritusSouthwest Airlines Co.Dallas, Texas • Pete Cook CEOFirst National Bank in AlamogordoAlamogordo, New Mexico • Elton M. HyderPresident and CEOEMH Corp. and C&E F.L. PartnershipFort Worth, Texas

  17. Dallas Federal Reserve Board of Directors • Joe Kim KingCEOBrady National BankBrady, Texas • Myron E. Ullman III(Deputy Chairman) Chairman and CEOJ.C. Penney Company Inc.Plano, Texas • James B. BexleyProfessor, FinanceSam Houston State UniversityHuntsville, Texas

  18. Dallas Federal Reserve Board of Directors • RenuKhatorChancellor, University of Houston System President, University of Houston • Richard W. Evans, Jr.Chairman and CEOCullen/Frost Bankers Inc.San Antonio, Texas • George F. Jones, Jr.President and CEOTexas Capital Bancshares Inc. andCEOTexas Capital BankDallas, Texas

  19. Dallas Federal Reserve Board of Directors • Margaret H. JordanPresident and CEODallas Medical ResourceDallas, Texas

  20. Presidents of the regional Federal Reserve Banks

  21. What does the “Fed” do? • hold the cash reserves of depository institutions and make loans to them • move currency and coin into and out of circulation, and collect and process millions of checks each day • provide checking accounts for the Treasury, issue and redeem government securities, and act in other ways as fiscal agent for the U.S. government

  22. What does the “Fed” do? • supervise and examine commercial banks that are members of the Federal Reserve System for safety and soundness • participate in the activity that is the primary responsibility of the Federal Reserve System, the setting of monetary policy

  23. Tools of the Federal Reserve • How they implement monetary policy

  24. 1) Open Market Operations • Open Market Operations—the buying and selling of U.S. Treasury and federal agency securities. • The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). This objective can be a desired quantity of reserves or a desired price (the federal funds rate). The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

  25. Members of the FOMC • Board of Governors (7 members) • Regional “Fed” Presidents (5 members)—NY always serves; Chicago serves every other year; others serve rotating one year terms: • 2013—Boston, St. Louis, Kansas City, Chicago • 2014—Chicago, Philadelphia, Dallas, Minneapolis • 2015—Cleveland, Richmond, Atlanta, San Francisco • Meets at Federal Reserve Headquarters in Washington, D.C.

  26. Beige Book--April 17, 2013 • Publishes “Beige Book”—released 3 weeks after FOMC meeting • Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from late February to early April. Activity in the Cleveland, Richmond, St. Louis, Minneapolis, and Kansas City Districts was characterized as growing at a moderate pace, while the Boston, Philadelphia, Atlanta, Chicago, and San Francisco Districts noted modest growth. The New York and Dallas Districts indicated that the pace of expansion accelerated slightly since the previous Beige Book. Most Districts noted increases in manufacturing activity since the previous report. Particular strength was seen in industries tied to residential construction and automobiles, while several Districts reported uncertainty or weakness in defense-related sectors. Consumer spending grew modestly, and firms in some Districts cited higher gasoline prices, expiration of the payroll tax cut, and winter weather as factors restraining sales growth. Retailers in several Districts expect continued sales growth in the near term. Overall vehicle sales remained strong or increased, but sales of used automobiles declined in some Districts. Travel and tourism expanded across most reporting Districts, boosted by both business and leisure travel.

  27. FOMO • The Federal Reserve Bank of New York trades U.S. government and select other securities with designated “primary dealers”. • Fed sell securities to banks—reduces money supply/increases interest rates (inflation) • Fed buys securities from banks—increases money supply /reduces interest rates (recession)

  28. Primary Dealers • Bank of Nova Scotia (Canada) BMO Capital Markets Corp. (Canada) BNP Paribas Securities Corp. (France)Barclays Capital Inc. (United Kingdom)Cantor Fitzgerald & Co. (United States)Citigroup Global Markets Inc. (United States)Credit Suisse Securities (USA) LLC (Switzerland)Daiwa Capital Markets America Inc. (Japan)Deutsche Bank Securities Inc. (Germany)Goldman, Sachs & Co. (United States)HSBC Securities (USA) Inc. (China)Jefferies & Company, Inc. (United States)J.P. Morgan Securities LLC (United States)Merrill Lynch, Pierce, Fenner & Smith Incorporated (United States)Mizuho Securities USA Inc. (Japan)Morgan Stanley & Co. Incorporated (United States)Nomura Securities International, Inc. (Japan)RBC Capital Markets, LLC (Canada)RBS Securities Inc. (Scotland)SG Americas Securities, LLC (France)UBS Securities LLC. (Switzerland)

  29. 2)”Target” interest rates • Open Market Operations increases/decreases money supply which affect interest rates. • Two important interest rates— • Federal Funds Rate—banks loaning their reserves to other banks • The Discount Rate—the interest rate charged to banks on loans they receive from the Federal Reserve’s lending facility—the “Discount Window”. Most are overnight loans. The discount rate is set above the Federal Funds rate. • Current rates: • Federal Funds Rate--.25 • Discount Rate--.75

  30. Reserve Requirements • Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks. • Currently set at 10% • Increase reserves (inflation) • Decrease reserves (recession)

  31. Putting it all together… • Inflation

  32. Putting it all together… • Recession

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