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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
slide12
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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