The Federal Reserve System Chapter 4 © 2003 South-Western/Thomson Learning

Slide 2 Learning 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

Slide 3 Organizational 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”

Slide 4 Organizational 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

Slide 5 Federal Reserve Banks  12 Districts  Each Federal Reserve Bank district served by Reserve Bank  Three largest are:  New York  Chicago  San Francisco

Slide 6 Federal Open Market Committee (FOMC) FOMC principal policy-making body within Federal Reserve System. FOMC principal policy-making body within Federal Reserve System.

Slide 7  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)

Slide 8 Functions 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

Slide 9 Exhibit 4–3 The Functions of the Fed

Slide 10 Fed’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

Slide 11 Fed’s Major Policy Tools  Reserve requirements  Required reserves-required reserve ration  Sweep accounts

Slide 12 Who Does What within the Fed  Board of Governors  Determines reserve requirements the discount rate  FOMC  Directs open market operations

Slide 13 Exhibit 4–5 Division 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

Slide 14 Federal 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

Slide 15 Fed’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