ECON330 Chapter 13: Central Banks and the Federal Reserve System

Federal Reserve Act of 1913

diffuses power along regional lines, between the private sector and the government, and among bankers, business people, and the public

-elaborate system of checks and balances

-decentralized

Federal Reserve Banks

the 12 district banks in the Federal Reserve System

Board of Governors of the Federal Reserve System

A board with seven governors (including the chair) that plays an essential role in decision making within the Federal Reserve System

Federal Open Market Committee (FOMC)

the committee that makes decisions regarding the conduct of open market operations; composed of the seven members of the board of Governors of the Federal Reserve System, the president of the Federal Bank of New York, and the president of four other Federal Reserve banks (on a rotating basis)

open market operations

the Fed’s buying or selling of bonds in the open market

functions of the federal reserve banks

-clear checks and issue currency

-withdraw damaged currency from circulation

-administer discount loans to banks in their districts

-evaluate proposed mergers and applications for banks

-liaison with the business community + collects data

-use staffs of professional economists to research topics related to the conduct of monetary policy

national banks

all ______ _____ are required to be members of the Federal Reserve System

commercial banks

_________ ______ chartered by the states are not required to be members of the Federal Reserve System but they can choose to join

Depository Institutions Deregulation and Monetary Control Act of 1980

subjected all banks to the same reserve requirements as member banks and gave all banks access to Federal Reserve facilities

-equal access to Federal Reserve Facilities

-reduced distinction between member and nonmember banks

Federal Reserve Bank of New York

-District contains many of the largest commercial banks in the U.S.

-Conducts examinations of bank holding companies and state-chartered member banks in its district

-largest units of the New York Fed

member banks

-Purchased stock in their district and divides paid by that stock are limited to 6% annually

-All national banks are required to be members of the Federal Reserve System

category A directors

elected by member banks and are professional bankers

category B directors

elected by member banks are prominent leaders from industry, labor, agriculture, or consumer sector

category C directors

appointed by Board of Governors to represent public interest and are not allowed to be officers, employees, or stockholders of banks

one, nonrenewable, 14-year term

term of Board of Governors

four-year renewable term

term of Chair of Board of Governors

green book

Detailed economic forecasts for next three years placed between covers

blue book

Projections for monetary aggregates along with alternative scenarios for the stance of monetary policy

beige book

produced by Reserve Banks and details evidence gleaned from surveys or talks with key businesses and financial institutions on the state of the economy in each of the Federal Reserve districts

tightening of monetary policy

increase in the federal funds rate

easing of monetary policy

the lowering of the federal funds rate

Alan Greenspan

-strong advocate for laissez-faire capitalism and headed successful economic consulting firm - data driven

-exercised extensive control over discussion at FOMC

instrument independence

the ability of the central bank to set monetary policy instruments

goal independence

the ability of the central bank to set the goals of monetary policy

nonrenewable terms

eliminate incentive to curry favor with prez or Congress

Rubin Doctrine

the independence of the Fed should be respected by having the president not comment on Fed policies