THE FEDERAL RESERVE SYSTEM & PURPOSES FUNCTIONS â€œ TIME IS MONEY â€¦â€ Patrick Dede Phirun Nop Sayak Bhattacharya The Federal Reserve System Structure of the system Monetary Policy and the Economy The Implementation of Monetary Policy The Federal Reserve in the International Sphere
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Structure of the system
Monetary Policy and the Economy
The Implementation of Monetary Policy
The Federal Reserve in the International Sphere
The Federal Reserve in the U.S. Payments System
Federal Reserve System, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. As a central Bank, the FED is independent butsubject to oversight by the U.S. Congress.
Ben ShalomBernanke was sworn in
on February 1, 2006, as Chairman
and a member of the Board of
Governors of the Federal Reserve
System. Dr. Bernanke also serves as
Chairman of the Federal Open
Market Committee, the System's
principal monetary policymaking
body. He was appointed as a
member of the Board to a full 14-
year term, which expires January 31,
2020, and to a four-year term as
Chairman, which expires January
(7 member of the BoG + 5 Banks Presidents)
Today, the Federal Reserve’s duties fall into four general
Goals of monetary policy are “to promote
effectively the maximum employment, stable
prices, and moderate long-term interest rates.”
The FOMC sets the federal funds rate at a level it believes will
foster financial and monetary conditions consistent with achieving
its monetary policy objectives.
“If the economy slows and employment softens, policy makers
will be inclined to ease monetary policy to stimulate aggregate
A change in the federal funds ratecan set off a chain of
events that will affect :
Supply of these balances through the following means:
Open market operations
Contractual clearing balances
Discount window lendingThe Instruments of the Monetary Policy
On the demand side,
The US government influences the economy through changes in
taxes and spending programs, which typically receive a lot of public
attention and are therefore anticipated.
On the supply side,
The Subprime Crisis, disruptions in the oil market that reduce supply,
agricultural losses, and slowdowns in productivity growth are
examples of adverse supply shocks.
Interest Rates have frequently been proposed as a guide to
policy, not only because of the role they play in a wide variety
of spending decisions but also because information on interest
rates is available on a real-time basis.
The Taylor Rule:If inflation is picking up, the Taylor rule
prescribes the amount by which the federal funds rate
would need to be raised or, if output and employment are
weakening, the amount by which it would need to be
Foreign Exchange Rates: Exchange rate movements are
an important channel through which monetary policy
affects the economy, and exchange rates tend to respond
promptly to a change in the federal funds rate.
Federal Reserve Balances
The Federal Reserve influences the economy through the market for balances that depository institutions maintain in their accounts at the Federal Reserve Banks.
Billions of dollars; annual averages of daily data
December 31, 2004 (Millions of dollars)
Open Market Operation
Required Reserve Balances
Contractual Clearing Balances
Need to be able to
Buy and sell quickly
At its own convenience
In whatever volume may be needed
The U.S. Treasury Securities market is the broadest and most active of U.S. financial market.
Change (basis points)
DateIncreaseDecreaseLevel (percent) 2007December 11 ... 25 4.25
October 31 ... 25 4.50
September 18 … 50 4.75
2006June 29 25 ... 5.25
May 10 25 ... 5.00
March 28 25 ... 4.75
January 31 25 ... 4.50
A contractual clearing balance is an amount that a depository institution agrees to hold at its Reserve Bank in addition to any required reserve balance. In return, the depository institution earns implicit interest, in the form of earnings credits, on the balance held to satisfy its contractual clearing balance.
1. Primary Credit
2. Secondary Credit
3. Seasonal Credit
The U.S. economy and the world economy are linked in many ways. The U.S. dollar, which is the currency most used in international transactions, constitutes more than half of other countries’ official foreign exchange reserves. U.S. banks abroad and foreign banks in the United States are important actors in international financial markets.
The activities of the Federal Reserve and the international economy influence each other.
The Federal Reserve’s actions to adjust U.S. monetary policy are designed to attain basic objectives for the U.S. economy. But any policy move also influences, and is influenced by, international developments.
US monetary policy actions influence exchange rates
The dollar’s exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy.
When interest rate increases,
The Federal Reserve conducts foreign currency operations—the buying and selling of dollars in exchange for foreign currency—under the direction of the FOMC, acting in close and continuous consultation and cooperation with the U.S. Treasury, which has overall responsibility for U.S.
A purchase of foreign currency by the Federal Reserve increases the supply of balances when the Federal Reserve credits the account of the seller’s depository institution at the Federal Reserve. Conversely, a sale of foreign currency by the Federal Reserve decreases
Moreover, international banking institutions are important vehicles for capital f lows into and out of the United States.
The international role of U.S. banks has a counterpart in foreign bank operations in the United States. U.S.
“By creating the Federal Reserve System,
Congress intended to eliminate the severe
financial crises that had periodically swept
the nation, especially the sort of financial
panic that occurred in 1907.”
The U.S. payments system is the largest in the world
The Federal Reserve therefore performs an important role as an
intermediary in clearing and settling interbank payments.
As the U.S. central bank, The FED is
The Federal Reserve plays an important role when the Treasury needs to raise money to finance the government or to refinance maturing Treasury securities.
As the central bank of the United States, The FED provide several
types of services to these organizations, including maintaining
non-interest-bearing deposit accounts (in U.S. dollars), securities
safekeeping accounts, and accounts for safekeeping gold.
Each day, the Reserve Banks process a large number of payment
transactions resulting from the Banks’ role in providing payment
services to depository institutions.
The Reserve Banks extend intraday credit, to facilitate the
settlement of payment transactions and to ensure the smooth
functioning of the U.S. payments system
The risk of providing this credit:
The Federal Reserve has developed a policy that balances the
goals of ensuring smooth functioning of the payments system and
managing the Federal Reserve’s direct credit risk from institutions’
use of Federal Reserve intraday credit.