Transcript Document

Chapter 5
The Overseer:
The Federal
Reserve System
© 2000 South-Western College Publishing
1
Federal Reserve System
The central bank of the
United States that regulates
the banking system and
determines monetary policy
and that was created in 1913
2
The Federal Reserve Act
The 1913 Congressional
act that created the
Federal Reserve System
3
Lender of Last Resort
The responsibility of the Fed
to provide an elastic currency
by lending to commercial
banks during emergencies
and thus providing banks
with the necessary funds to
avoid insolvency
4
The Banking Reform Acts of
1933 & 1935
Acts passed by Congress in
response to the collapse of the
banking system between 1930
and 1933 which put in place
many banking reforms designed
to insure the safety and
soundness of the system; also
broadened the power of the Fed
5
Board of Governors
Seven governors of the Fed
appointed by the President
with Senate approval for
14-year terms
6
Reserve Bank
One of 12 Federal Reserve
Banks located in a large
city in its district
7
Federal Reserve Banks
•Boston
•New York
•Philadelphia
•Richmond
•Cleveland
•Atlanta
•Chicago
•Dallas
•Kansas City
•St. Louis
•Minneapolis
•San Francisco
8
The largest
Federal Reserve Banks
•New York
•Chicago
•San Francisco
9
The Fed Open Market
Committee (FOMC)
The principal policy-making
body within the Federal
Reserve System, composed of
the seven members of the
Board of Governors and five
Reserve Bank presidents
10
Policy Directive
Statement of the FOMC
that states its policy
consensus and sets forth
operating instructions
regarding monetary policy
11
Monetary Policy
The attempts by the Fed to
stabilize the economy and
to ensure sufficient money
and credit for an expanding
economy
12
Board of Governors
- Seven members appointed by the
president of the United States and
confirmed by the Senate for 14 year terms
- One of the seven governors is appointed
chairperson by the president of the United
States and confirmed by the Senate for a 4
year term
- The Board of Governors appoints three
of the nine directors to each Federal
Reserve Bank
Exhibit 5.2
13
Twelve Federal Reserve Banks
Each with nine directors who appoint
the Reserve Bank president and
other officers of the Reserve Banks
Exhibit 5-2
14
Federal Open Market Committee
(FOMC)
Seven members of the Board of Governors
plus the president of the New York Fed and
presidents of four other Reserve Banks
Exhibit 5.2
15
Nearly 5,000 Member
Commercial Banks
Elect six of the nine directors to each
Reserve Bank
Exhibit 5.2
16
FUNCTION
S OF THE
FED
Formulates
Monetary
Policy
Actions
taken to
improve the
health of
the
economy
Exhibit 5.3
Supervises
and
Regulates the
Financial
System
Actions
taken to
insure the
safety and
soundness of
the financial
system
Facilitates
the
Payments
Mechanism
Actions
taken to
insure the
safe and
efficient
transfer of
funds
Acts as Fiscal
Agent for the
U.S.
Government
Maintains
the
Treasury’s
transaction
s account
17
Payments Mechanism
The ways in which funds
are transferred to make
payments
18
Mary writes a
check to Dad
Check
Dad receives and
deposits check
Check
deposited
Check
canceled
Mary’s bank
Dad’s bank
Check
forwarded
Federal Reserve bank
Exhibit 5.4
19
Open Market Operations
The buying and selling of
government securities by the
Fed to change the reserves of
depository institutions
20
Discount Rate
The rate depository
institutions are charged to
borrow reserves from the Fed
21
Required Reserves
The amount of reserve
assets that the Fed requires
depository institutions to
hold against outstanding
checkable deposit liabilities
22
Required Reserve Ratio
The fraction of deposit
liabilities that must be
held as reserve assets
23
Board of Governors
(7 appointed members)
- Sets reserve requirements and approves
discount rates as a part of monetary policy
- Supervises and regulates member banks
and bank holding companies
- Establishes and administers protective
regulations in consumer finance
- Oversees Federal Reserve Banks
Exhibit 5.5
24
Twelve Federal Reserve Banks
(Reserve Banks -12 Districts)
- Propose discount rates
- Lend funds to depository institutions
(discount policy)
- Furnish currency
- Collect and clear checks and transfer
funds for depository institutions
- Handle U.S. government debt and
cash balances
25
Exhibit 5.5
Federal Open Market Committee
(FOMC)
(Board of Governors plus 5 Federal
Reserve Bank presidents)
Directs open market operations (buying and
selling of U.S. government securities), which
are the primary instrument of monetary policy
Exhibit 5.5
26
Freedom of Information Act
A 1966 law that
requires more openness
in government and
more public access to
government documents
27
Proposed Reforms
•Change in status of Reserve Bank
presidents on the FOMC
•Broadening of authority of GAO
•Mandated disclosure of monetary
policies and discussions
28