ECO211 CH 13

The Federal Reserve System

Federal Reserve System (Fed)

The central bank of the United States

Board of Governors

THe governing body of the Federal Reserve System

Federal Open Market Committee (FOMC)

The Fed’s 12-member policy-making group. Has the authority to conduct open market operations

Monetary Policy

Changes in the money supply or in the rate of change of the money supply, intended to acheive stated macroeconomic goals

Open Market Operations

The buying and selling of US government securities; controls the supply of bank reserves and influencing short term interest rates

Discount Rate

the interest rate charged to commercial banks for short-term “discount window” loans; used to manage liquidity, influence overall market interes rates, and signal monetary policy shifts

Required Reserve Ratio

The percentage of deposits banks must hold in reserve; influences lending capacity and the money supply

Interest on Reserve Balances (IORB)

The Fed pays interest on the balances banks hold at the Federal Reserve. By adjusting this rate, the Fed influences bank lending; a higher IORB means banks are less likely to lend to others below that rate, putting upward pressure on the FFR.

Overnight Reverse Repurchase (ON RRP)

This facility allows a broader set of financial institutions (like money market funds) to deposit money with the Fed overnight. By offering a set return on these funds, the ON RRP rate acts as a floor for overnight market rates, ensuring rates do not fall below the target

Reserves

A percentage of each dollar deposited that must be held in reserve form (bank deposit at the Fed or vault cash)

Required Reserves

The minimum dollar amount of reserces a bank must hold against its checkable accounts, as mandated by the Fed

Excess Reserves

Any reserves held beyond the required amount; the difference between (total) reserves and required reserves

Cash Leakage

Occurs when funds are held as currency instead of deposited into a checking account

Change in Checkable Deposits (or money supply)

1/required reserve ratio * the change in total reserves resulting from the initial injection of funds

Reserve Deficient

The situation that exists when a bank holds fewer reserves than specified by the required reserve ratio

Federal Funds Market

A market in which banks lend reserves to one another, usually for short periods

Federal Funds Rate

The interest rate in the federal funds market; the interest rate banks charge one another to borrow reserves

Federal Funds Rate Target

The interest rate that the Fed wants the federal funds market rate to be