Download Ch._14

Ch. 14 – The Federal Reserve and
Monetary Policy
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Role of the Fed -
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1) Supervise member banks (audit/oversight)
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2) Holds cash reserves (available for short-term loan
to banks and gov't)
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3) Moves money in and out of circulation
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Characteristics of the Fed
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1) No single central bank
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12 Federal Reserve districts, 25 branch offices
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2) Ownership and control by member banks
The Federal Reserve (cont)
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Organization of the Federal Reserve -
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1) Board of Governors
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7 members
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Appointed by President to 14 yr term
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Supervises banking services & regulates money
supply
2) Federal Open Market Committee (FOMC)
12 members (7 governors, 4 Fed presidents + Fed of
NY president)
Meet eight times per year to set interest rates
Ch. 14, Sec. 2 – Federal Reserve at
Work
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Services to Banks:
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1) Check Clearing -
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Electronic movement of funds from check writer's
account to check receiver's account
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2) Loans to banks -
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Member banks can borrow from the Fed
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Why? Seasonal needs, natural disasters, financial
emergencies
Fed at Work (cont)
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Services to Government -
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1) The Government's Bank -
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Depository for federal revenues (taxes)
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Holds checking account for Treasury (tax refunds,
Social Security checks, etc)
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Conducts purchase and sale of gov't securities
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2) Supervises member banks
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Fed examiners conduct audits
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Monitors member banks reserves
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Regulates bank mergers
Fed at Work (cont)
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3) Regulates US money supply
The Fed (NY district) buys and sells US govt
securities on the open market
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MONEY SUPPLY?
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M1 – Money in circulation or readily available
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Currency, travelers checks, checking accts
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M2 – less available cash
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Money market accounts, savings, CD's
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M3 -
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CD's > $100,000, Eurodollars ($ deposited by US
Ch. 14, Sec. 3 – Monetary Policy
Strategies
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Monetary Policy Expansion or contraction of the money supply in
order to influence the cost and availability of credit
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1) Easy-money policy:
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Expand money supply and lower interest rates
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Increase aggregate demand
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Decrease unemployment
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Increase economic growth
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Can lead to inflation at times
Monetary Policy (cont)
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2) Tight-money policy:
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Used to slow business activity and stabilize prices
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Contract money supply and raise interest rates
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Reduce aggregate demand
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Decrease economic growth
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Reduce inflation
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Can lead to unemployment at times
Monetary Policy (cont)
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Components of Monetary Policy:
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1) Open-Market Operations -
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Buying/Selling gov't securities
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Contract money supply --> Sell gov't securities (T)
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Expand money supply --> Buy gov't securities (E)
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2) Discount Rate -
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Interest rate that Fed charges member banks to use
reserves
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Lower rate --> expand money supply (E)
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Raise rate --> contract money supply (T)
Monetary Policy (cont)
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3) Reserve Requirement Money banks are required to hold on their own or at the
Fed
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Lower reserve reqmt --> Expand money supply(E)
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Raise reserve reqmt --> Contract money supply(T)
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Other indirect controls determined by the Fed:
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Margin requirement -
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% cash required to purchase stocks and bonds
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Credit regulation -
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Availability of consumer credit
Monetary Policy (cont)
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Moral Suasion -
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The last tool available to the Fed
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Using press releases, conferences, testimony before
Congress – the Fed hopes to channel behavior of
banks without using formal regulations
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Monetary Policy Limitations:
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1) Forecasting the economy?
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2) Time Lags
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3) Lack of coordination between fiscal/monetary
policies or federal/state policies