the federal reseve system

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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill /Irwin

Chapter Four The Federal Reserve

System, Monetary Policy,

and Interest Rates




Major Duties and Responsibilities

of the Federal Reserve System

• Conducting monetary policy

• Supervising and regulating depository

institutions• Maintaining the stability of the financial

system

• Providing payment and other financial servicesto the U.S. government, the public, FIs and

foreign official institutions




Structure of the Federal Reserve

System

• 12 FR Banks plus 10 branches located in

major U.S. cities• A 7-member Board of Governors in

Washington, DC

• The Federal Open Market Committee(FOMC)




Functions Performed by the Federal

Reserve Banks

• Assistance in the Conduct of Monetary

Policy

• Supervision and Regulation• Government Services

• New Currency Issue

• Check Clearing• Wire Transfer Services

• Research Services




Locations of FR Banks and Branches

• Banks located in Atlanta, Boston, Chicago,

Cleveland, Dallas, Kansas City, Minneapolis, New

York, Philadelphia, Richmond, San Francisco and

St. Louis• Branches located in Baltimore, Birmingham,

Buffalo, Charlotte, Cincinnati, Denver, Detroit, El

Paso, Helena, Houston, Jacksonville, Little Rock,

Los Angeles, Louisville, Memphis, Miami,

Nashville, Oklahoma City, Omaha, Pittsburgh,

Portland Salt Lake City, San Antonio, Seattle




Board of Governors

• Headquartered in Washington, DC• Each of 7 members appointed by the president of the

United States and confirmed by the Senate

• Board members serve nonrenewable 14-year terms

• President designates two members to chairman and vice-

chairman for four year terms

• Primary responsibilities are the formulation and conduct

of monetary policy and the supervision and regulation of banks

• Chairman advises President on economic policy and

serves as spokesperson for the FR system


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Federal Open Market Committee

(FOMC)

• The major monetary policy-making body of the FR

System

• Main responsibilities are to formulate policies to

promote full employment, economic growth, pricestability, and a sustainable pattern of international

trade

• Open market operations--the purchase and sale of

U.S. government and federal agency securities

• Sets ranges for growth of monetary aggregates and

directs the FR in foreign exchange markets



Balance Sheet of the Federal Reserve

(in billions of dollars)

Assets Liabilities and Equity

Gold and foreign exchange $ 27.1 Depository institution reserves $ 21.7

SDR certificates 7.2 Vault cash of commercial banks 41.0Treasury currency 27.4 Deposits due to federal government 6.7

Federal Reserve Float 0.1 Deposits due to rest of the world 1.3

FR loans to domestic banks 0.5 Currency outside banks 503.0

Security repurchase agreements 22.1 Miscellaneous liabilities 8.6

U.S. Treasury securities 489.0 FR Bank stock 7.6

U.S. government securities 0.2Miscellaneous assets 16.3

Total assets $589.9 Total liabilities and equity $589.9



Objective of Money Policy

• To influence the amount of reserve in the

banking system…

• which affects interest rates and availability of

credit and…

• ultimately affects the levels of employment,

output, prices and inflation



Monetary Policy Tools

• Open Market Operations

– primary determinate of changes in excess reserves in

the banking system impacting the size of the money

supply and/or interest rates• The Discount Rate

– the rate of interest FR Banks charge on emergency

loans to depository institutions

• Reserve Requirements

– determine the minimum amount of reserve assets that

depository institutions must maintain by law to back

transaction deposits held as liabilities



Impact of Monetary Policy

on Various Economic Variables

Expansionary

Activities

Contractionary

Activities

Impact onReserves

Credit availability

Money supply

Interest ratesSecurity prices



Alternate Monetary Policy Foci

Interest

Rate

Quantity of Money

(in billions)

i’

i*

i’’

MS

MD’

MD’’

MD

Interest

Rate

Quantity of Money

(in billions)

i* = 6%

i’’= 5%

MS’ MS

MD’

MD

MD’’

the federal reseve system

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