the federal reserve richard slevinsky 4/7/03. outline history organization & functions policies...
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U.S. Bank History
First Bank of United StatesEst. 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 1836-18631,400 bank institutions, up to 1,600 note typesInefficient, subject to counterfeiting
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 19072nd and 3rd largest banks in country closedDepositors withdrew funds (run on banks)JP Morgan et al., backed remaining banks to restore depositor faith
Reform
Bankers realized reform needed. Washington not easily convincedAldrich-Vreeland Act
Est. commission to study banking systems and adapt changes if applicable.
Aldrich PlanContained several ideas of Federal ReserveLack of central authorityUniform discount rate
Federal Reserve Established
Created by Federal Reserve Act, 1913Purposes:
To provide the country with an elastic currencyCentralize bank reservesProvide multi-regional check / currency clearing system, to reflect country’s regions and growthProvide banking facilities for the federal government
Organization of the “Fed”
Main components of the Federal Reserve
Federal Reserve Board of GovernorsFederal Reserve BanksFederal Open Market Committee (FOMC)
Board of GovernorsSeven 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
Chairman: Alan GreenspanVice-Chairman: Robert W. Ferguson, Jr.Other members:
Edward M. GramlichSusan Schmidt BiesMark W. OlsonBen S. BernackeDonald L. Kohn
Federal Reserve Banks
12 regional reserve banksEach 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.
ResponsibilitiesDistribution of currency (paper and coin)Supervise BanksDept. of Treasury functions
FOMC
Composed of the 7-member Board of Governors and 5 Reserve Bank presidents
Reserve Bank of NY is always a memberOther FRB presidents serve one-year terms
Implements national monetary policyDetermines the Fed’s open-market transactions
Determines holdings of foreign currencies
Policies
The Federal Reserve has three main tools to execute its monetary policy
Open market operations – the purchase and sale of government securitiesReserve requirements – the required cash reserve a financial institution must keep at the FedThe discount rate – rate at which the Fed lends funds to banks
Open Market OperationsThe Fed controls bank reserves by buying/selling U.S. Treasury and federal securities
Controls money supplyEffects banks’ lending capacity, and ratesBuying from a bank increases that banks’ lending capacity increases money supplyBy selling securities, the Fed effectively re-acquires what it issued before reduces money supplyBank interest rates can be controlled for short periods of time in this way
Reserve requirements
Seldom used by Fed to control bank reservesSmall change in requirements translates to massive changes in the dollar reserve requirementBanks are obligated to deposit in the Fed a specified percentage of its liabilities
Discount Rate
Interest rate charged to banks on loans they receive from Federal Reserve Bank
Lending facility called discount window
3 types of loansPrimary: loaned to stable institutionsSecondary: liquidity needs, financial difficultiesSeasonal: Repeating intra-year fluctuations, loaned to agricultural banks, seasonal resort lenders.
Discount Rate HistoryDISCOUNT RATE
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
1/1/70 10/17/74 8/2/79 5/17/84 3/2/89 12/16/93 10/1/98 7/17/03
Date
Perc
en
t
Other Fed rolesFight inflation
Discipline monetary growth and credit growth• Through interest rates
Monitor Gross National Product (GNP) andUnemployment
DebtCheck Congressional spending/incomeTrade deficitsStrength of dollarFed is more flexible than Congress
Other Fed roles
Check GNP growthIf 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
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)
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