135 Midterm 2

UCSB Garatt

Ben Bernake

2006 Chairman of Fed, increased opacity

public large payment system

Fedwire

private large payment system

CHIPS

matched sale-purchase transaction

Fed manages float/liquidity, agreement to sell securities to buy back in a week

Purchases and sales of government securities by the Federal Reserve are called

open market operations

How did the Fed restore faster payment processing

lowered overdraft fee to 0

FOMC

Fed Board, pres of NY Fed + 4 other

FED “dual mandate“

high employment, stable prices

System Open Market Account

contains assets for open market operations

Desk

Open Market Trading Desk, implements FOMC policy by buying/selling securities

Discount Window

Where banks go to borrow money (Reserve Banks change discount rate)

Federal funds Rate in 2008

Effectively 0

Pre-2008 FFR tools

OMO to manage reserves, point target

Post-2008 FFR tools

QE and then Interest on reserves and repos, target range

Demand for reserves is

downward sloping

supply of reserves is

perfectly inelastic

how does IOER act as a FFR floor

banks won’t lend to each other if they can make that much by keeping their reserves in the Fed

how does IOER NOT act as FFR floor

GSEs and FHLBs can’t earn interest so loan at below IOER, and must accept low rates from a small set of banks due to imperfect competition and regulation (Basel 3) making borrowing costly

ON RRP

Overnight Reverse Repurchase, offered to gov entities / nonbanks to solve IOER problems

GSE and FHLB

Government Sponsored Entities and Federal Home Loan Banks

after 2014 FFR stays between

ON RRP and IOER

Mechanism of Exploding Reserves

Banks not lending to each other causes inability to repay loans→ Fed solves this by lending directly to banks, causes increase in reserves

Solution to panic of 87

securities start to fail; give loans to banks to give to securities

time-inconsistent nature of monetary policy

incentive for policy makers to explode money supply (good in short term bad in long term)

Primary Dealers

Securities brokers, do not create deposit money (them getting reserves doesn’t cause cascading effect)

Why don’t banks usually borrow directly from the fed

Usually higher cost than FFR, signals weakness, higher regulatory scrutiny

OMO purchase causes FFR to

fall

OMO sale causes FFR to

rise

OMO when sufficiently high reserves causes FFR to

do nothing

FFR vs Q reserve