the federal reserve system chapter 4 © 2003 south-western/thomson learning
TRANSCRIPT
The Federal Reserve System
The Federal Reserve System
Chapter 4
© 2003 South-Western/Thomson Learning
Slide 2
Learning ObjectivesLearning Objectives How the Fed is organized
What is the Federal Open Market Committee
(FOMC)
Most important functions of the Fed
Fed’s major policy tools
What is a “lender of last resort”
Controversy regarding Fed independence
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Organizational Structure of the Federal Reserve SystemOrganizational Structure of the Federal Reserve System
Federal Reserve Act Central bank
Lend funds to commercial banks during emergencies
Provide these banks with funds to avoid insolvency & bankruptcy-
“lender of last resort”
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Organizational Structure of the Federal Reserve SystemOrganizational Structure of the Federal Reserve System Banking Reform Acts of 1933 & 1935
Congress provided additional policy tools and regulations Fed needed
Federal Reserve System a full-fledged central bank Regulate and supervise operation of financial
system Foster smooth-running, efficient, competitive
financial system Promote overall health/stability of economy
through its ability to influence the availability and cost of money/credit
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Federal Reserve BanksFederal Reserve Banks
12 Districts Each Federal Reserve Bank
district served by Reserve BankThree largest are:
New York
Chicago
San Francisco
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Federal Open Market Committee (FOMC)
Federal Open Market Committee (FOMC)
FOMC principal policy-makingbody within Federal Reserve
System.
FOMC principal policy-makingbody within Federal Reserve
System.
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Policy directive 2 – 4 paragraph statement
Represents digest of meeting Indicates policy consensus of FOMC Sets forth operating instructions (or
directive) to Federal Reserve Bank of NY regarding conduct of monetary policy
Federal Open Market Committee (FOMC)
Federal Open Market Committee (FOMC)
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Functions of the FedFunctions of the Fed
Formulation and Implementation of Nation’s Monetary Policy
Supervision and Regulation of Financial System
Facilitation of Payments Mechanism Operation as Fiscal Agent for
Government
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Exhibit 4–3The Functions of the Fed
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Fed’s Major Policy ToolsFed’s Major Policy Tools
Open market operations
Involve buying & selling of US government securities by the Fed
Discount rate & discount rate policy
Interest rate Fed charges depository institutions that borrow reserves
directly from Fed
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Fed’s Major Policy ToolsFed’s Major Policy Tools
Reserve requirements Required reserves-required reserve
ration Sweep accounts
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Who Does What within the FedWho Does What within the Fed
Board of Governors Determines reserve requirements the
discount rate
FOMC Directs open market operations
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Exhibit 4–5Division of Responsibility within the Federal Reserve System
Source: The Federal Reserve System: Purposes and Functions, (Washington, D.C: Board of Governors of the Federal Reserve System, 1984), p.5
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Federal Reserve SystemFederal Reserve System
Quasi-government agency Stabilizes the economy
Does not depend on appropriation from Congress for its funding
Exempt from many provisions of the Freedom of Information Act (1966) and “government in the sunshine” legislation
Does not take orders from anyone in executive or legislative branch of government
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Fed’s IndependenceFed’s Independence Opponents would like to see reforms such as
Change in status of Reserve Bank presidents on the FOMC
Broadening of authority of General Accounting Office (GAO) to audit Fed
Mandated disclosure of monetary policies & discussions
In part is an illusion Only maintained if Fed operates within politically
acceptable bounds Congress can change the law