1. © 2004 Pearson Addison-Wesley. All rights reserved 14-1 Formal Structure of the Fed

2. © 2004 Pearson Addison-Wesley. All rights reserved 14-2 Functions of the Fed Monetary Policy –Open Market Operations / Reserve Requirements / Discount Loans District Bank Functions Check Clearing Currency Logistics: Issue / withdraw Supervise and examine banks Administer discount loans Liaison with local business Collect economic data Economic research

3. © 2004 Pearson Addison-Wesley. All rights reserved 14-3 Federal Reserve Districts

4. © 2004 Pearson Addison-Wesley. All rights reserved 14-4 Informal Structure of the Fed

5. © 2004 Pearson Addison-Wesley. All rights reserved 14-5 Federal Reserve: The Leaders Benjamin Strong: President FRBNY thru 1928 Board of Governors Chairmen Marriner Eccles, 1934 – 1948 –implementation of New Deal / financing WWII Wm. McChesney Martin, 1951 – 1970 –Restored Fed independence / “golden age” / Vietnam Arthur F. Burns, 1970 – 1978 –Political business cycle / Stagflation –Prominent economist gone wild Paul Volcker, 1979 – 1987 –Disinflation Alan Greenspan, 1987 – –Lender of last resort (Black Monday) / Tech boom / Confidence

6. © 2004 Pearson Addison-Wesley. All rights reserved 14-6 Federal Reserve Board of Governors Alan Greenspan, Chair –Sets FOMC Agenda / kicks off policy discussion / suggests directive / speaks for Fed before Congress –Controls BOG staff: Green Book, Blue Book Roger Ferguson, Vice Chair –Management consultant Edward Gramlich –U. of Michigan Economist, Dean Susan Schmidt Bies –Banker Mark Olson –Banker / Regulator Ben Bernanke –Princeton Economist: The “Credit Channel” / Inflation Targeting Donald Kohn –FRBKC / BOG Staff Economist

7. © 2004 Pearson Addison-Wesley. All rights reserved 14-7 District Bank Presidents Boston: Kathy Minehan – Operations, MIS New York: Timothy Geithner-Gov’t economist, Kissinger Assoc Philadelphia: Anthony Santomero - Wharton (finance) Cleveland: Sandra Pianalto - Cleveland Fed economist Richmond: Jeffrey Lacker – Richmond Fed economist Atlanta: Jack Guynor – Atlanta Fed operations Chicago: Michael Moskow – Gov’t/Business/Academic economist St. Louis: William Poole – Brown U. economist Minneapolis: Gary Stern – Minneapolis Fed economist Kansas City: Thomas Hoenig: K.C. Fed economist Dallas: Robert McTeer: Richmond Fed economist/regulator San Francisco: Janet Yellin: Berkeley economist / CEA / BOG

8. © 2004 Pearson Addison-Wesley. All rights reserved 14-8 Central Bank Independence Factors making Fed independent 1.Members of Board have long terms 2.Fed is financially independent: This is most important Factors making Fed dependent 1.Congress can amend Fed legislation 2.President appoints Chairmen & Board members; influences legislation Overall: Fed is quite independent Other Central Banks 1.Bank of England least independent: Govt. makes policy decisions 2.European Central Bank: independent—price stability primary goal 3.Bank of Canada and Japan: fairly independent, but not all on paper 4.Trend to greater independence: New Zealand, European nations

9. 14-9 Explaining Central Bank Behavior Should Fed be Independent? Case For: 1.Independent Fed likely has longer-run objectives, politicians don't: independence produces better policy outcomes less inflation bias 2.Avoids political business cycle Case Against: 1.Fed may not be accountable 2.Hinders coordination of monetary and fiscal policy 3.Fed has often performed badly