The Federal Reserve System II. Fed Structure & Purpose ECO 473 – Money & Banking – Dr. D. Foster

The Fed’s Balance Sheet – 12/2007 In millions of dollars.

The Fed – 2014 Treasury Securities ……… $2.6 trillion Holdings of MBS …………. $1.8 trillion Total Assets ………………… $4.5 trillion

The Fed – Q2 2017 Treasury Securities ……… $2.56 trillion Holdings of MBS ……… $1.8 trillion Total Assets ….… $4.47 trillion

FRS – Total Assets; 2007-2017 Sept. 2017: $4.46 t. $2.46 t. $1.77 t.

The Fed – 2014 FR Notes outstanding ….. $1.3 trillion Bank reserve deposits …. $2.4 trillion Total Liabilities ……….…… $4.5 trillion

The Fed – Q2 2017 FR Notes outstanding ….. $1.49 trillion Bank deposits …. $2.15 trillion Total Liabilities ……… $4.47 trillion

FRS – Total Liabilities; 2007-2017 Sept. 2017: $4.46 t. $2.31 t. $1.58 t. $0.41 t.

Goals of Monetary Policy Inflation goals: Low/no inflation with limited year-to-year variability. Output goals: High and stable economic (GDP) growth. Employment goals: Stable employment growth with low unemployment.

Federal Reserve Policy Tools Open Market Operations Buy/sell Treasury bonds to affect bank reserves. The major form of monetary policy. What will the Fed do if we run out of Treasury bonds? Discount Window Lend to member banks to affect bank reserves. Purpose is to target the “federal funds rate” – iff This is the rate that banks charge each other for very short term loans. Required Reserve Ratio (rrD) Changing this affects bank excess reserves directly. Used more to reflect structural changes. Was used in 1937 and precipitates more Great Depression. Time to let this go? New policy? – Pay banks i for ER (!!)

Intermediate Targets of Monetary Policy The key rationale for intermediate targeting: The limited long-term information about the economy available to policymakers.

Monetary Policy: Goals & Targets Open Market Operations Discount Window Required Reserve Ratio (rrD) Price stability Low unemployment Sustainable growth Interest Rates Monetary Aggregates

Choosing an Intermediate Target Variable Characteristics: Frequently observable Consistency with ultimate goals Definable and measurable Controllable Potential variables: Monetary aggregates M1, M2, MZM Interest rates (fed’l funds, prime …) Others: Nominal GDP Credit aggregates Exchange rates

Targeting the Federal Funds Rate of Interest Sept. 2017 1.15%

The Federal Reserve System II. Fed Structure & Purpose ECO 473 – Money & Banking – Dr. D. Foster