2. The Federal Reserve Bank
Monetary Policy
The Federal Reserve Bank

3. History of the Federal Reserve Bank
Established in 1913
Bank Panic of 1907
Ensure stability of the banking system

4. FED Structure National Board of Governors
Presidential appointments – Senate confirms
7 members – 14 year terms
Chair – 4 year term
Independent within the Government

6. FED Structure Regional 12 districts Presidents – serve unlimited terms
Usually professional economists
New York FED President is most important
Center of U.S. Financial markets
International currency markets
Open Market Committee permanent voting member
Timothy Geithner – Obama’s Sec of Treasury

7. FED Structure Open Market Committee
Key Policy Making Group – (meeting today!)
Chaired by FED chair
Release minutes & have Press Conference
All 7 members of Board of Governors
All vote
All 12 regional presidents (discuss)
NY FED President vice-chair votes always
4 others vote on rotating basis (Chi, Dal, Mpls, Phil)

8. FED Structure

9. FED MAP

10. Duties of the FED Services Maintain Cash / Currency
Detects Counterfeits
Clears Checks
Electronic Transfers – FEDWIRE & ACH
Bank for the Federal Government

11. Duties of the FED Maintain Confidence Bank Inspections / Audits
Lender of Last Resort
If no other bank will lend to a bank
Take over failing banks

12. Duties of the FED Regulates – Monitors - Audits State Chartered Banks
Bank Holding companies
Foreign banks operations in U.S.
Community Reinvestment Act – Stop Redlining
Truth in Lending Act

13. Monetary Policy Goals Price Level Stability Economic Growth
Full Employment
FED views itself as the nation’s inflation fighter
Inflation – Tight money policy (Contractionary)
Contraction – Easy money policy (Expansionary)

14. FED – Monetary Policy Tools
Reserve Requirements
% of deposits banks cannot lend out
Determines the money multiplier
Raising the RR – Tight Money
Lowering the RR – Easy money
Not used very often

15. FED – Monetary Policy Tools
Discount Rate / Primary Credit Rate (2003)
Interest Rate FED Charges member banks
Benchmark Interest Rate
Lender of Last Resort
Raising DR – Tight Money
Lower DR – Easy Money
Used Occasionally – Key signal

16. FED – Monetary Policy Tools
Switch to Primary Credit Rate in 2003

17. Fred

18. FED – Monetary Policy Tools
Open Market Operation (Open Bailout Operations)
Most powerful tool minutes
Affects Federal Funds Rate
Interest Rate banks charge other banks on loans
FED buys and sells bonds on the open market
Buys Bonds – Injects money – Easy money
Used during contractions
Sells Bonds – Withdraws money – Tight money
Used to fight inflation
FED policies are more effective at fighting inflation

19. FED – Monetary Policy Tools

21. Policy actions taken on Dec 13, 2011
News Report
Statement

22. FED – Monetary Policy Tools
Open Mouth Operations
FED Chair is an important position
Current chair is Ben Bernanke
Previous – Alan Greenspan, Paul Volker
Testify to Congress 4x a year
Press Conference After OMC – began Ap 2011
Speeches
Alan Greenspan - December 5, 1996.
Used term “irrational exuberance”
Stock market dropped the next day

26. FED Humor Who should be the FED chair
Columbia Business School's Dean Glenn Hubbard sings about wanting Alan Greenspan's job that went instead to New Fed Chair Ben Bernanke. Parody created by Columbia Business School students in 2006.