The Federal Reserve (1913)

The Governments Bank and the Bank for the Banks…

Structure of the Federal Reserve

The Federal Reserve – (President / BOG)

12 Federal Reserve District BanksBranch (District) Banks – OmahaIndividual Banks – Your Bank…

Board of Governors (BOG)

7 membersappointed by the President, with the consent

of the Senateserve 14 year, non-renewable terms, staggeredsets policy instruments other than open

market operationsdecides permissible activities of banks and

holding companies

The Fed Chairman “Chief or President”

Important Chairs of the BOG (Federal Reserve) (4 Year Terms)

Paul Volcker -- 1979-87

Alan Greenspan -- 1987-2006

Ben Bernanke – 2006-2014

Janet Yellen – 2014-

The Federal Open Market Committee (FOMC)

12 voting members -- 7 Board of Governors + 5 District Bank Presidents (19 members in all)

meet 8 times per year (more, if needed)design monetary policy, by specifying

Federal Funds rate(FAC) Federal Advisory Committee

Federal Reserve District Banks

each bank exists within 12 districts within the US

holds deposits of Federal Governmentcollects economic data and does

economic researchInsure the banks (FDIC)performs check clearing services

Federal Reserve District Banks

District Banks -- Administer Monetary Policy

conduct Discount Loans with banks within district

enforce reserve requirements for banks within district

hold reserves of banks within districtNew York bank most important, open

market operations done there

Federal Reserve Branch Banks and Member Banks

Branch (District) Banks -- serve as decentralized regulators, primarily for larger Fed districts in geographic size – More to the West – Omaha is the closest for us.

Private Banks – your bank!

How Independent is The Federal Reserve?

Structure implies considerable independence.

Federal Reserve is financially independent of the Federal Government’s budget.

The President and the

Federal Reserve

-- President appoints members of

the BOG

-- BOG typically serve less than 14

year terms

-- part of the legislative process,

can introduce legislation

The Biggest Argument For Continued Independence

Current Federal Reserve can make the tough policy decisions.

The track record of the US Federal Reserve: the Volcker and Greenspan years.

Expansionary and Contractionary Policy

Expand $ - Recession / Unemployment

Contract $ - Inflation / Growth

The Fed’s Tools

Open Market OperationsThe Discount RateReserve RequirementInterest Rate Bias

KNOW THESE VERY WELL!

Open Market Operations

Buying and Selling BondsMost used of the tools!Expansion – Fed Buys BondsContraction – Fed Sells Bonds

The Discount Rate

The tool that’s in the news…How much banks pay for $.DR changes the interest rate.Expansion – Lower the DR.Contraction – Raise the DR.

Legal Reserve Requirement

The tool of last resort…How much banks can lend out.Banks can “create” money.Deposit Multiplier 1/RR x DepositExpansion – Lower the RR.Contraction – Raise the RR.