Ch. 13 Central Banks and the Federal Reserve System

what was the federal reserve system created out of?

fear of centralized power, and distrust of moneyed interests

what happened when there was no lender of last resort?

there were nation wife bank panics regularly. a central bank serves as security when a bank fails.

What did the federal reserve act of 1913 create?

it defused power between regional lines, private sector, government, bankers, business owners and the public

what did the federal reserve Act of 1913 result in?

The federal reserve banks, the board of governors and federal reserve system, the FOMC, the federal advisory council, and 2900 member commercial banks

what are the policy tools of the federal reserve

Reserve requirements, interest paid on excess reserves, open market operations, and the discount rate charged on discount loans

What are the federal reserve banks?

quasi public institution owned by commercial banks in districts that are members of the federal system

how many directors and districts are in the federal reserve?

9 directors and 12 districts total: 6 per district and 3 by board of governors.

What are the functions of the federal reserve banks?

• clear checks

• issue new currency

• admin and make discount loans to banks

• evaluate mergers and bank expansions

• liason between businesses and federal reserve system

• research about monetary policy and data on local business condition s

Why is the Federal Reserve Bank of NY have a special role?

Its essential to the stability of the US financial system, and has many of the large commercial banks in the US.

Who is a permanent meber of the FOMC as vice chair?

The President of the NY Federal reserve bank

How do federal reserve banks impact monetary policy?

The directors establish the discount rate that banks have for discount loans and 5/12 bank presidents vote in the FOMC

What does it mean to be a member bank of the Federal Reserve banks?

All national bank must be a member, and commercial banks chartered by banks are not required by can choose to be a member.

What is the role of the Chairman of Board of Governors?

• advises the president on economic policy

• testifies in congress

• speaks about federal reserve system to media

• represents US in negotiations with foreign governments on economic matters.

What is the role of the board of governors

• votes on open market operations

• sets reserve requirements

• controls discount rate w/ review

• approves bank mergers

• supervises foreign banks in US

What are the conditions of the board of governors?

• 7 members in DC

• appt. by pres confirmed/senate

• 4 yr term, nonrenewable

What does FOMC stand for?

Federal open market committee

What are the conditions of the FOMC?

• 8 yearly meetings

• board of gov. chairman = FOMC chairman

What takes place during FOMC meetings

• report on foreign currency and domestic open market operations

• Presentation/board staff on national economic forecast

• outline of diff. scenarios/monetary policy action

• public announcement / meeting outcome

Who Runs the FOMC meetings

Chair of Board of Governors

What are the responsibilities of the Chair of the Board of Governors

• Spokes person / Fed

• negotiates w/congress + president

• speaks and votes 1st about monetary policy

• supervises professional economists and advisors

How independent is the Fed

• instrument and goal independence

• independent revenue

• fed structure written by congress can change any time

What is the case for federal reserve independence?

• subjecting it to more political pressure would impact inflationary bias to monetary policy

• political business cycle

• be used to facillitate treasury financing/large budget deficits

• too important to leave to politicians.

What is the case against Federal Reserve independence.

• undemocratic to have monetary policy controlled by an elite group

• unaccountable

• hard to coordinate fiscal and monetary policy

• hasnt used independence successfully in preventing financial crises in recent history (2008 GFC)