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The Federal Reserve System

The Federal Reserve System. Chapter 14. Federal Reserve System. Passed through Congress narrowly in December 1913 Regional banks to disperse power and allay fears of monopoly capitalism. Lender of Last Resort. Fed would stand ready to lend to banks that were solvent but illiquid.

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The Federal Reserve System

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  1. The Federal Reserve System Chapter 14

  2. Federal Reserve System • Passed through Congress narrowly in December 1913 • Regional banks to disperse power and allay fears of monopoly capitalism

  3. Lender of Last Resort • Fed would stand ready to lend to banks that were solvent but illiquid. • Loans would be made through discounting high grade loans—the bank would sell an IOU from a credit-worthy borrower, the Fed would take the present value of the face value using the “discount rate.” • Today the Fed lends directly but the interest rate is still called the discount rate.

  4. Discount Rate Set one percentage point above the Fed funds target. Currently at 6.25%.

  5. 12-7-12 12 Fed banks 7 members of the Board of Governors 12 members of the Federal Open Market Committee

  6. Federal Reserve Districts

  7. Member bankers’ bank (keeps deposits and makes loans when reserves are too low) Clear checks Issue new currency and withdraw old Oversee bank mergers Liaison with the business community and collect data Bank examinations Research for input into monetary policy decisions Functions of the Fed Banks

  8. Board of Governors • 7 members. • 14 year non-renewable terms, one opens up every second January. • Chairman has 4 year renewable term. • http://www.federalreserve.gov/bios/

  9. Federal Open Market Committee • 12 members • 7 members of the Board of Governors + 5 Fed bank presidents (always including the President of the FRBNY) • http://www.federalreserve.gov/FOMC/

  10. Open Market Operations

  11. FOMC Books • Green (national forecast) • Blue (projected monetary aggregates) • Beige (regional banks assessment of economy)

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