Lecture 23

Final exam breakdown

review credit expansion
What role does the Federal Reserve Play?
What is the structure of the Federal Reserve
System (the Fed)?
The Federal Reserve System

Created by an Act of congress in 1913

Serves as the Central Bank of the US
The purpose of the Federal Reserve is
to conduct monetary policy for the
US
 The Federal
Reserve System
The central bank of the United States is
the Federal Reserve System, usually
called “the Fed.”
A central bank is a bank’s bank and a
public authority charged with
regulating and controlling a nation’s
monetary and financial institutions
and market.
 A Bank’s Bank

The Fed provides banking services to

commercial banks such as Chase
Manhattan and Wells Fargo Bank.
The Fed does not provide general
banking services for businesses and
individuals.
Monetary Policy and the Fed
The Fed conducts the nation’s
monetary policy, which means that it
adjusts the quantity of money in
circulation.
The Fed has four goals:
Keep inflation in check
Maintain full employment
Moderate the business cycle
Maintain adequate long-term growth
 The Origins of the
Federal Reserve System
The Fed was created by the Federal
Reserve Act of 1913 after several
previous attempts to establish a
central bank were unsuccessful.
The bank panic of 1907 was so severe
that most people finally agreed the
nation needed a central bank.
 The Fed and Central Banks

Most central banks were originally

private banks that evolved.
In setting up the Fed, care was taken to
design a central bank that diffused
and decentralized responsibility for
monetary policy.
The Fed’s structure is unique among
central banks.
 The Structure of the
Federal Reserve System
There are three key elements in the
structure of the Federal Reserve
System:
The Board of Governors
The Regional Federal Reserve Banks
The Federal Open Market Committee
 The Board of Governors
The Board of Governors includes
seven members appointed by the
President and confirmed by the
Senate.
Each member is appointed for a 14 year
term, one place becoming vacant
every two years.
The Chairman is appointed to a
renewable four year term.
The Federal Reserve Banks
There are 12 Federal Reserve banks,
one for each district.
Each bank has nine directors, three
appointed by the Board of Governors
and six elected by member banks in
the district.
The directors appoint the bank’s
president subject to approval by the
Board of Governors.
 The New York Fed

The Federal Reserve Bank of New York

implements most of the Fed’s
decisions on monetary policy.
As such, the president of the New York
Fed is always a voting member of the
Federal Open Market Committee.
 Federal Open
Market Committee
The Federal Open Market Committee
(FOMC) is the main policy-making
group of the Fed, consisting of the
following voting members:
The Board of Governors (7)
The president of the New York Fed (1)
The presidents of four of the other
regional banks rotate (4)
 FOMC Meetings

The FOMC meets every four weeks to

review the state of the economy and
formulate monetary policy.
All governors and regional bank
presidents participate in the
discussion, after which the 12 voting
members cast their votes on
monetary policy for the next month.
 The Fed’s Power Center

The Chairman of the Board of

Governors usually has the largest
influence on monetary policy.
There have been some remarkable
chairmen, including Paul Volcker who
eradicated inflation in the early 1980s.
Alan Greenspan is the current chair
 Sources of the
Chairman’s Power
The chairman’s power and influence
stem from three sources:
Control of the FOMC’s agenda and
discussion
Daily contact with technical experts gives
the chairman a detailed background on
monetary policy issues
Being the main point of contact with the
U.S. and foreign governments.
 The Fed’s Policy Tools

The Fed controls the amount of money

in circulation in the United States by
using three tools:
Required reserve ratios
Discount rate
Open market operations
 Required Reserve Ratio
All depository institutions in the United
States are required to hold a
minimum percentage of their
deposits as reserves.
This minimum percentage is called the
required reserve ratio.
Changes in the required reserve ratio
cause the money multiplier to
change, changing the money supply.