Transcript The Federal Reserve System and the Monetary Policy

The Federal
Reserve System
and the
Monetary
Policy
Chapter 16
The FRS
 History






1790: Bank of the USA
1811 charter ends
1816: restore Second Bank of USA
1836 charter ended
1907: Bank Panic - Congress acts
1913: Federal Reserve Act
Federal Reserve Act 1913
 The
Fed recommended by National
Monetary Commission 1908
 1930 - 33: tight money policy --exactly
wrong, except NY region
 12 regional banks acted independently
 1935 reforms for FRS; more centralized
Structure of the FED
 Board
of Governors
 Sets monetary policy
 Headquarters in Washington DC
 7 member board serve 14 years
 Appointed by President, approved by
Senate
 President appoints chairmen - serves 4
years


Alan Greenspan: 1987 - 2006
Ben Bernake: 2006
12 Districts
 One
FR Bank in each district
 Monitors reports on economic and
banking conditions
 Member banks in district elect 3 bankers
and 3 leaders in industry, commerce, or
other businesses to district boards
Member Banks
 All
nationally chartered banks
 State chartered banks join voluntarily
 Approximately 4,000 Fed member banks
 Federal Advisory Council collects
information about each district and
reports to each FRS
Federal Open Market
Committee
 FOMC
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

Makes key decisions about interest rates
and Ms
Meets 8 times a year
Committee members
 Board

All governors
 12

of governors
District banks
5 of 12 district bank presidents
Functions of the FRS
 Serving
Government
 Serving Banks
 Regulating Banks
 Regulating Money Supply Ms
FRS: Serves Government
 Federal

Governments Bank
Checking accounts for Treasury Dept.
 Government

Sells, transfers, redeems government bonds,
bills, notes
 Issuing

securities auction
currency
Federal reserve notes
FRS: Serving Banks
 Clears
checks
 Supervising lending practices
 Bank mergers (bank holding company)
 Lender of last resort


Federal fund rate: interest banks pay when
banks loan money to banks
Discount rate: interest rate when banks
borrow from the FRS
FRS: Regulating Banking
System
 Reserve
requirement
 Bank examination

Net worth
FRS: Regulating Ms
 Factors




that affect demand for money
Cash needed on hand
Interest rates
Price levels in the economy
General level of economy
 Stabilizing


the economy
Recession
Inflation
Ms, ir and I
Ms
ir
ir
Md
I
Q
Q
Dept. of Treasury & Money
 Dept.
of Treasury manufactures money



prints
Coins
2013 $1.2 Trillion

Money creation: process by which money
enters the economy
Fractional banking
 Money



gets into the economy
Required reserve ratio (RRR)
Money multiplier = 1/rrr


Excess reserves
Reserve shortage
Federal Reserve Tools
 Reserve
Rate (reserve ratio)
 Discount Rate
 Open Market Operation
 Quantitative
Easing (2008)
Policy Options
 Reserve
requirement =Ms
 Reserve requirement=Ms
 Discount Rate =Ms
 Discount Rate =Ms
 Buy Bonds = Ms
 Federal Fund Rate
 Sell bonds = Ms
 Federal
Fund Rate 
Using Monetary Policy
 Omo
are the most used of FRS monetary
policy tools
 Today do not change RRR
 Omo or discount rate do not disrupt
financial institutions

Federal fund rates Greenspan used
Monetary Policy and
Macroeconomic Stabilization
 Recessionary
gap
 Ms
needs to
increase
 Easy monetary
policy


gap
 Ms needs to
decrease
 Tight money policy

Buy bonds


 Inflationary
Fed fund rate down
Discount rate down
Reserve requirement
down
Sell Bonds
 Fed


fund rate up
Discount rate up
Reserve
requirement up
Problem of Timing
 Good
timing: smooths fluctuations
 Bad timing: makes economy worse
 Policy lags


Inside lags: delay in implementing policy
Outside lags: time it takes for monetary
policy to have an effect
Predict Business Cycle
 Inflation
 Recession
Fiscal & Monetary Policy Tools:
Congruent

Expansionary Tools

Fiscal policy



G increases
T decreases

Contractionary Tools


Monetary policy

Omo purchase
bonds

decrease fed fund
rate
Decrease reserve
requirements
 Decrease discount
rate

Fiscal Policy


G decreases
T increase
Monetary Policy

Omo sale of bonds



Increase Fed fund rate
Increase reserve
requirement
Increase discount
rate
Fiscal and Monetary Policy:
Not Congruent

LBJ Presidency
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
Spending Vietnam
Great Society
Fiscal

Increase spending
Decrease taxes
Monetary
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
Tight monetary policy
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

Sell bonds in omo
Increase reserve ratio
Increase discount
rate
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
Obama
Presidency/Republica
n Congress

Cut deficit / cut debt


Decrease spending
Increse taxes

Loose monetary
policy
Fiscal
Monetary




Buy bonds
Decrease reserve ratio
Decrease discount
rate
Quantitative Easing
(QE)