Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 27 Policy Implementation

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Who Are the Primary Dealers? Primary Dealers as of May 23, 2001 Below is a list of the 25 primary dealer that buy and sell securities directly with the Fed in the execution of monetary policy. In recent years, the number of primary dealers has fallen due to mergers among large financial institutions. ABN AMRO Inc.Fuji Securities Inc. BMO Nesbitt Burns Corp.Goldman, Sachs & Co. BNP Paribas Securities Corp.Greenwich Capital Markets, Inc. Bank of American Securities LLCHSBC Securities (USA) Inc. Bank One Capital Markets, Inc.J. P. Morgan Securities, Inc. Barclays Capital Inc.Lehman Brothers Inc. Bear Stearns & CO., Inc.Merrill Lynch Government Securities Inc. CIBC World Markets Corp.Morgan Stanley & Co. Inc. Credit Suisse First Boston Corp.Nomura Securities International, Inc. Daiwa Securities America Inc.SG Cowen Securities Corp. Deutsche Bank Securities Inc.Salomon Smith Barney Inc. Dresdner Kenilworth Benson UBS Warburg LLC North America LLCZions First National Bank SOURCE: Federal Reserve Bank of New York.

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Total Reserves Total Reserves Demanded Total Reserves Components Total Reserves Supplies Buffer against check-clearing needs and other uncertainties Transaction’s Reserve Deposits XRatio Excess Reserves Borrowed Reserves (discount window) Nonborrowed Reserves Deposits at the Fed Vault Cash == == SOURCE: Adapted from Ann-Marie Meulendyke, U.S. Monetary Policy and Financial Markets (New York: Federal Reserve Bank of New York, 1998).

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Reserve Computations Under Contemporaneous and Lagged Reserve Accounting (a) Reserve Computation and Maintenance Periods under Contemporaneous Reserve Accounting Week 1Week 2TWTFSSM Week 3Week 4TWTFSSM Week 5 TWTFSSM Two-Week Computation Period for Cash Two-Week Computation Period for Checkable Deposits TWTFSSMTWTFSSMTWTFSSM Two-Week Maintenance Period (b) Reserve Computation and Maintenance Periods under Lagged Reserve Accounting TWTFSSM TWTFSSM TWTFSSM TWTFSSM TWTFSSM TWTFSSM TWTFSSM TWTFSSM TWTFSSM Two-Week Computation Period for Cash and Checkable Deposits Two-Week Maintenance Period

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Fed’s Balance Sheet as of May 31, 2001 (in Millions of Dollars) 1 Gold certificate account 2 Special drawing rights certificate account 3 Coin Loans 4 To depository institutions 5 Other 6 Acceptances held under repurchase agreements 7 Repurchase agreements—triparty a Federal agency obligations b 8 Bought outright 9 Held under repurchase agreements 10 Total U.S. Treasury securities b 11 Bought outright c 12 Bills 13 Notes 14 Bonds 15 Held under repurchase agreements 16 Total loans and securities 17 Items in process of collection 18 Bank premises Other assets 19 Denominated in foreign currencies d 20 All other e 21 Total assets Assets $11,046 2,200 1, , , , ,415 98, ,035 7,670 1,504 14,759 18, ,730

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Fed’s Balance Sheet as of May 31, 2001 (in Millions of Dollars) (continued) 22 Federal Reserve notes 23 Reverse repurchase agreements—triparty a 24 Total deposits 25 Depository institutions 26 U.S. Treasury—General account 27 Foreign—Official accounts 28 Other 29 Deferred credit items 30 Other liabilities and accrued dividends f 31 Total liabilities Liabilities $564, ,040 19,238 4, ,910 3, ,351 Capital Accounts 32 Capital paid in 33 Surplus 34 Other capital accounts 35 Total liabilities and capital accounts $7,070 6, ,730 a Cash value of agreements arranged though third-party custodial banks. b Face value of the securities c Includes securities loaned-fully guaranteed by U.S. Treasury securities pledged with Federal Reserve Banks-and includes compensation that adjusts for the effects of inflation on the principal of inflation-indexed securities. Excludes securities sold and scheduled to be bought back under matched sale-purchase transactions. D Valued monthly at market exchange rates. e Includes special investment account at the Federal Reserve Bank of Chicago in Treasury bills maturing within 90 days. f Includes exchange-translation account reflecting the monthly revaluation at market exchange rates of foreign exchange commitments SOURCE: Federal Reserve Bulletin (August 2001): A10

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. A Guide to Open Market Operations Fed Activity 1. No Fed buying or selling. 2. The Fed uses matched sales. 3. The Fed engages in system repurchase agreements. Translation The Fed is not expected to intervene. The Trading Desk sells Treasury securi- Tiesto primary dealers. Buyers agree to sell them back at a specified time, usually the next day, which temporarily absorbs reserves. The Trading Desk provides funds (reserves) in exchange for Treasury securities with an agreement that dealers will repurchase them, usually the next day, which temporally increases reserves. Implication A reserve add or intervene drain is not required, or it can be accommodated later when more information is available or market conditions begin to more clearly reflect or indicate the need. A reserve drain is required, which may mean that either (a) the drain is consistent with prevailing Fed policy and necessary to prevent undesired fed funds rate declines or (b) the Fed has tightened. Reserves must be added, which may mean that either (a) the increase is consistent with prevailing policy and necessary to prevent undesired fed funds rates increases or (b) the Fed has eased.

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. A Guide to Open Market Operations (continued) Fed Activity 4. The Fed makes outright sales. 5. The Fed makes outright purchases. Translation A permanent transaction has occurred with no resale agreements. The Fed sells Treasury securities in the open market, absorbing reserves. Bills only are sold. The opposite of an outright sale has occurred. The Fed buys securities in the open market with no repurchase agreements on the part of the sellers, injecting reserves permanently. Implication Reserves are drained out of the banking system. Such a move is usually not associated with a change in policy, but is conducted seasonally and occasionally when underscoring a policy move toward restraint. Reserves are permanently added. The action is usually not associated with policy implications, but is conducted seasonally to provide for economic growth. Can occasionally signal policy moves toward easing.