Federal Reserve System Americans long resisted a central bank Fear of centralized power Distrust of moneyed interests First U.S. experiments with a central bank terminated in 1811 and in 1836 Without lender of last resort … Nationwide bank panics on a regular basis Panic of 1907 a central bank needed Federal Reserve Act of 1913 Elaborate system of checks and balances Decentralized District banks: Quasi-public institution owned by private member commercial banks in the district
Functions of Federal Reserve District Banks Clear checks Issue new currency/withdraw damaged currency from circulation Make discount loans to banks in district Evaluate mergers/expansions of bank activities Liaison between business community and the Fed Examine bank holding companies and state-chartered member banks Collect data on local business conditions Research Money, Banking and the Financial System
Board of Governors Seven members headquartered in D.C. Appointed by president/confirmed by Senate 14-year non-renewable term Chairman serves 4-year renewable term Chairman speaks for Fed/“Runs the Show” Set reserve requirements Control the discount rate Direct open market operations Approve bank mergers Regulate bank holding companies/foreign banks in the US
Federal Open Market Committee(FOMC) Meets eight times a year … more often if needed Reports on domestic and currency open market operations “Green book” forecast “Blue book” forecasts … responses to alternative policies 12 Voting members: 7 Fed Governors; president of FRBNY; and presidents of 4 other district banks in rotation BoG Chairman chairs FOMC Directive to the trading desk at FRBNY announced at end of meeting
How Independent is the Fed? Instrument independent Goal independent … undemocratic? Political pressure would impart inflationary bias to monetary policy Political business cycle? Could facilitate Treasury financing of large budget deficits— accommodation Independent revenue Structured by Congress/accountable to Congress Presidential influence Influence on Congress Appoints members Appoints chairman
European Central Bank Patterned after the Federal Reserve Central banks from each country play similar role as Fed district banks Monetary operations are not centralized ECB does not supervise and regulate financial institutions More independent than Fed Maastricht Treaty would have to be revised to change ECB charge But less goal independent than Fed Price Stability Rules