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Chapter 16. Structure of Central Banks & the Federal Reserve System. Origins Structure Comparison to ECB. Origins. “the Fed” Federal Reserve Act 1913 response to panic of 1907 obstacles fear of centralized power solution decentralized structure. Structure. 3 main parts:

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chapter 16 structure of central banks the federal reserve system
Chapter 16. Structure of Central Banks & the Federal Reserve System
  • Origins
  • Structure
  • Comparison to ECB
origins
Origins
  • “the Fed”
  • Federal Reserve Act 1913
    • response to panic of 1907
  • obstacles
    • fear of centralized power
  • solution
    • decentralized structure
structure
Structure
  • 3 main parts:
    • Federal Reserve Banks
    • Board of Governors
    • FOMC
federal reserve banks
Federal Reserve Banks
  • 12 regional banks
  • serve the member banks in that district

-- all national banks

-- option for state banks

-- 33% of commercial banks

slide6
who controls district banks?
    • member banks are part owners

-- 6% dividends

-- part of Board of directors

    • other officers chosen by Board of Governors
slide7
functions
    • clear checks
    • provide/destroy currency
    • research regional economy

-- Beige Book

    • economic education
    • monetary policy
    • approval of mergers, purchases
  • FRBNY is most important district bank
1980 didmca
1980 DIDMCA
  • all depository institutions
    • keep reserves on deposit at district bank
    • have access to discount loans
board of governors
Board of Governors
  • 7 governors
    • 14-yr. terms (nonrenewable)
    • 1 chair

-- 4-year renewable term

-- Alan Greenspan (1987-2006)

-- Ben Bernanke (2006-

slide10
Board helps set monetary policy
    • on FOMC
    • sets reserve requirement
    • approves district discount loan rates
  • Board staff economists
    • economic research
    • collect data
slide11
Board enforces regulations
    • permissible activities for banks
    • Consumer protections
    • stock margin requirements
    • final say in bank mergers
slide12
FOMC
  • Federal Open Market Committee
  • 12 members
    • 7 governors
    • FRBNY President
    • 4 other district bank presidents rotate
slide13
meet every 6 weeks
    • assess condition of economy
    • vote on monetary policy

-- announce decision later that day

(since 1996)

slide14
FOMC & monetary policy
    • voting on federal funds rate target
    • voting on open market operations

-- buying & selling of Treasury debt by the Fed

fed structure reality
Fed structure & reality
  • appears decentralized
  • but power concentrated w/
    • Board of governors
    • Chair
fed independence
Fed Independence
  • Fed has much more independence in decisions than other federal agencies
  • Fed governors do NOT serve “at pleasure of the President”
  • Fed decisions not subject to approval of President or Congress
sources of independence
sources of independence
  • structure
    • Board of governors have long, nonrenewable terms
    • popularity of chairman w/ financial sector
slide18
financing
    • Fed is self-financing

-- Treasury debt

-- discount loans

-- other services

    • Does not depend on Congress for funding
fed independence is not complete
Fed independence is not complete!
  • Congress has ultimate power to limit or eliminate Fed
  • chairman testifies before Congress every 6 months
is independence good
Is independence good?
  • common in industrialized countries
  • but it is undemocratic
slide21
Pros
  • political goals often conflict with economic goals
    • short term vs. long term goals
    • Congress: re-election
    • Fed: free to pursue unpopular policies in short-run

-- price stability may require slower economic growth

example 1981 82 recession
example: 1981-82 recession
  • Fed chair Paul Volcker slowed down economy to control inflation
    • “Volcker Recession”: ’81-’82
  • results of low inflation:
    • 2 long expansions in 1980s, 1990s
slide24
Cons
  • Fed not accountable for mistakes
    • stuck with bad governors
  • independence is no guarantee of success
    • Fed did not prevent bank failures of Great Depression
    • inflation of 1970s
ecb a comparison
ECB: a comparison
  • European Central Bank
    • 1999
    • Central bank for monetary policy of 12 euro countries
    • A larger economy than U.S.
ecb structure
ECB structure
  • Executive board
    • like Board of Gov
  • National Central Banks (NCB)
    • Like Federal Reserve Banks
  • Governing Council
    • Like FOMC
key differences
Key differences
  • ECB does NOT regulate financial institutions
  • ECB gets budget from NCB
  • No voting on the Governing Council
  • VERY independent
    • Countries cannot change ECB decisions