1 / 22

The Federal Reserve System and the Monetary Policy

The Federal Reserve System and the Monetary Policy. Chapter 16. The FRS. History 1790: Bank of the USA 1811 charter ends 1816: restore Second Bank of USA 1836 charter ended 1907: Bank Panic - Congress acts 1913: Federal Reserve Act. Federal Reserve Act 1913.

axel
Download Presentation

The Federal Reserve System and the Monetary Policy

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 System and the Monetary Policy Chapter 16

  2. The FRS • History • 1790: Bank of the USA • 1811 charter ends • 1816: restore Second Bank of USA • 1836 charter ended • 1907: Bank Panic - Congress acts • 1913: Federal Reserve Act

  3. Federal Reserve Act 1913 • The Fed recommended by National Monetary Commission 1908 • 1930 - 33: tight money policy --exactly wrong, except NY region • 12 regional banks acted independently • 1935 reforms for FRS; more centralized

  4. Structure of the FED • Board of Governors • Sets monetary policy • Headquarters in Washington DC • 7 member board serve 14 years • Appointed by President, approved by Senate • President appoints chairmen - serves 4 years • Alan Greenspan: 1987 - 2006 • Ben Bernake: 2006

  5. 12 Districts • One FR Bank in each district • Monitors reports on economic and banking conditions • Member banks in district elect 3 bankers and 3 leaders in industry, commerce, or other businesses to district boards

  6. Member Banks • All nationally chartered banks • State chartered banks join voluntarily • Approximately 4,000 Fed member banks • Federal Advisory Council collects information about each district and reports to each FRS

  7. Federal Open Market Committee • FOMC • Makes key decisions about interest rates and Ms • Meets 8 times a year • Committee members • Board of governors • All governors • 12 District banks • 5 of 12 district bank presidents

  8. Functions of the FRS • Serving Government • Serving Banks • Regulating Banks • Regulating Money Supply Ms

  9. FRS: Serves Government • Federal Governments Bank • Checking accounts for Treasury Dept. • Government securities auction • Sells, transfers, redeems government bonds, bills, notes • Issuing currency • Federal reserve notes

  10. FRS: Serving Banks • Clears checks • Supervising lending practices • Bank mergers (bank holding company) • Lender of last resort • Federal fund rate: interest banks pay when banks loan money to banks • Discount rate: interest rate when banks borrow from the FRS

  11. FRS: Regulating Banking System • Reserve requirement • Bank examination • Net worth

  12. FRS: Regulating Ms • Factors that affect demand for money • Cash needed on hand • Interest rates • Price levels in the economy • General level of economy • Stabilizing the economy • Recession • Inflation

  13. Ms, ir and I Ms ir ir Md I Q Q

  14. Dept. of Treasury & Money • Dept. of Treasury manufactures money • prints • Coins • 2013 $1.2 Trillion • Money gets into the economy • Money creation: process by which money enters the economy • Fractional banking • Required reserve ratio (RRR) • Money multiplier = 1/rrr • Excess reserves • Reserve shortage

  15. Federal Reserve Tools • Reserve Rate (reserve ratio) • Discount Rate • Open Market Operation • Quantitative Easing (2008)

  16. Policy Options • Reserve requirement =Ms • Reserve requirement=Ms • Discount Rate =Ms • Discount Rate =Ms • Buy Bonds = Ms • Federal Fund Rate • Sell bonds = Ms • Federal Fund Rate 

  17. Using Monetary Policy • Omo are the most used of FRS monetary policy tools • Today do not change RRR • Omo or discount rate do not disrupt financial institutions • Federal fund rates Greenspan used

  18. Monetary Policy and Macroeconomic Stabilization • Recessionary gap • Ms needs to increase • Easy monetary policy • Buy bonds • Fed fund rate down • Discount rate down • Reserve requirement down • Inflationary gap • Ms needs to decrease • Tight money policy • Sell Bonds • Fed fund rate up • Discount rate up • Reserve requirement up

  19. Problem of Timing • Good timing: smooths fluctuations • Bad timing: makes economy worse • Policy lags • Inside lags: delay in implementing policy • Outside lags: time it takes for monetary policy to have an effect

  20. Predict Business Cycle • Inflation • Recession

  21. Fiscal & Monetary Policy Tools: Congruent • Expansionary Tools • Fiscal policy • G increases • T decreases • Monetary policy • Omo purchase bonds • decrease fed fund rate • Decrease reserve requirements • Decrease discount rate • Contractionary Tools • Fiscal Policy • G decreases • T increase • Monetary Policy • Omo sale of bonds • Increase Fed fund rate • Increase reserve requirement • Increase discount rate

  22. Fiscal and Monetary Policy: Not Congruent • LBJ Presidency • Spending Vietnam • Great Society • Fiscal • Increase spending • Decrease taxes • Monetary • Tight monetary policy • Sell bonds in omo • Increase reserve ratio • Increase discount rate • Obama Presidency/Republican Congress • Cut deficit / cut debt • Fiscal • Decrease spending • Increse taxes • Monetary • Loose monetary policy • Buy bonds • Decrease reserve ratio • Decrease discount rate • Quantitative Easing (QE)

More Related