1 / 16

Paul Vangilder

The Federal Reserve. Paul Vangilder. History. Created on December 23, 1913 in response to a century of banking panics Lender of Last Resort Dual Mandate Maximum Employment Price Stability Recently assumed increased regulatory duties. Structure. 13 Regional Fed Banks

amal
Download Presentation

Paul Vangilder

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Federal Reserve Paul Vangilder

  2. History • Created on December 23, 1913 in response to a century of banking panics • Lender of Last Resort • Dual Mandate • Maximum Employment • Price Stability • Recently assumed increased regulatory duties

  3. Structure • 13 Regional Fed Banks • Headquartered in DC • New York Fed • Largest and most influential bank • Conducts open market operations • Vault holds 216 million troy ounces of gold

  4. Monetary Policy • 3 Main Tools • Reserve Requirement • Proportion of demand deposits a bank must hold on reserve at Fed • Lower Reserve Requirement: Stimulative • Allows banks to make more loans • Raise Reserve Requirement • Banks forced to keep more on reserve at Fed • Leads to less loans • Discount Window • Short-term, secured lending facility that banks can borrow from • Raise Rate-Contractionary Policy • Lower Rate-Stimulative • Open Market Operations

  5. Open Market Operations • FOMC Committee determines Open Market Operations • Chairman Ben Bernanke and 9 other Members • Eight meetings per year • Announcements on policy highly anticipated by Wall Street • Fed Buys short-term government bonds • Stimulative • Lowers interest rates • Increases money supply • Fed Sells short-term government bonds • Contractionary • Raises interest rates • Decreases money supply MSU Student Investment Association

  6. Open Market Operations • Fed Funds Rate • Overnight lending between banks • Currently 0-0.25%, intended to “stimulate” economy • Recently Announced it will be 0% through 2014 • Buy short-term bonds to lower rate • Increases liquidity in banking system • Sells short-term bonds to raise Fed Funds rate • Decreases liquidity • Large Scale Asset Purchases (QE) beginning 2008 • Fed buys long-term government bonds as opposed to just short-term

  7. Historical Fed Funds Rate

  8. Quantitative Easing • QE1 November 2008 to Spring 2010 • Fed Purchased: • $125 Billion in Agency Debt (Fannie/Freddie and Treasuries) • $1.25 Trillion in Mortgage Backed Securities (MBS) • Objective: Stimulate the economy, lower interest rates, and fight deflation • Shadow Objectives • Support solvency of the banking system • Devalue the dollar to boost exports • Drove stock market rally from March ‘09 to April ‘10

  9. QE2 • Summer 2010 • S&P 500 down 10% • GDP Growth Sub 2% • Fears of “Deflation” resurface • Bernanke informally announces QE2 at August 2010 Jackson Hole Speech • QE2 Formally begins November 2010 • To last through June 2011 • Fed purchased 4-6 billion in US Treasury securities per day • $600 Billion in total • 100% monetization of debt issuance from the Treasury

  10. QE’s effect on Markets • S&P 500 rises from 666 to over 1200 during QE1 • S&P 500 rises to multi year highs of 1,363 during QE2 • Inflation Rises • Oil up to $135/barrel in April 2011 • Gold Reaches all-time highs • Tremendous pressure on emerging market inflation

  11. Fed Balance Sheet vs S&P 500

  12. Operation Twist • Shift Duration of Fed’s Treasury portfolio • Fed will sell $400 Billion in 0-3 Treasuries • Buy $400 Billion in 6-30 Treasuries • Designed to lower long-term interest rates

  13. “Bernanke Put” • Put Option • Contract that insures an investor against loss • Derived from “Greenspan Put” • Fed Chairman 1986-2006 • Met every distress in financial markets with lower interest rates and more liquidity • QE provides temporary relief to structural economic problems • Pattern: • Economic problems resurface shortly after QE ends • Seen in Summer 2010 and August-September 2011

  14. Fed and Volatility • August 2011 Fed Meeting-No QE3 • Dow down 200 points immediately • Rallied over 600 points to finish up over 4%

  15. QE3? • Key metrics to watch to provide political will for QE3 • S&P 500~sub 1100 • WTI Crude oil~sub $80 • EUR/USD continues to fall • Dollar strength not good for short-term exports • Structure of QE3 • Bill Gross: $600 Billion of MBS Purchases • Others: Nominal GDP Targeting

More Related