Exam 2 FINA exam 2

Federal Reserve Act (1913)

The legislation that created the Fed to provide a stable monetary system and address the distrust of centralized financial power.

Decentralization (Fed Structure)

The system design that balances regional interests (12 Reserve Banks) with centralized authority (Board of Governors).

Board of Governors:

The 7-member central leadership of the Fed; members serve 14-year, nonrenewable, staggered terms to ensure political independence.

FOMC (Federal Open Market Committee)

The 12-member body (7 Governors + 5 Presidents) that makes key decisions regarding interest rates and the money supply.

New York Federal Reserve

The most influential regional bank; it has a permanent FOMC vote and houses the Open Market Desk to execute policy.

Open Market Desk

The operational arm located at the NY Fed that physically buys and sells government securities to implement monetary policy.

The Dual Mandate

The Fed’s two primary statutory goals: Maximum Sustainable Employment and Stable Prices (low inflation

Price Stability

The goal of keeping inflation low and predictable; the Fed currently targets a long-run average of 2%.

Policy Transmission

The process by which the Fed's interest rate changes move through the financial system to affect the real economy (hiring, spending, etc.)

Federal Funds Market

The private market where commercial banks provide overnight, unsecured loans of reserves to one another.

Federal Funds Rate (FFR)

The interest rate charged in the fed funds market; it is the Fed’s primary target for signaling monetary policy.

Reserve Demand

The quantity of reserves banks wish to hold; the curve slopes downward because lower interest rates make holding reserves less costly.

Reserve Supply

The total quantity of reserves available in the system, primarily controlled by the Fed via Open Market Operations.

Open Market Operations (OMO)

The buying and selling of Treasury securities to change the level of reserves and the monetary base.

Open Market Purchase

The Fed buys securities, increasing bank reserves and lowering the federal funds rate.

Open Market Sale

The Fed sells securities, decreasing bank reserves and raising the federal funds rate.

Discount Window

the facility through which the Fed provides "lender of last resort" loans to banks.

Discount Rate

The interest rate charged by the Fed on discount loans; it acts as the "ceiling" for the federal funds rate.

Primary vs. Secondary Credit

Primary credit is for sound banks at a lower rate; secondary credit is for troubled banks at a higher rate.

Interest on Reserve Balances (IORB)

The rate the Fed pays banks on the reserves they hold at the Fed; it acts as the "floor" for the federal funds rate.

Reserve Requirement

The percentage of deposits a bank must hold as reserves; currently set at 0% in the modern Fed environment.

Corridor System

A policy framework where the FFR is kept between a floor (IORB) and a ceiling (Discount Rate).

Monetary Base (MB)

The sum of Currency in Circulation plus total Reserves (Required + Excess).

T-Account

A simplified balance sheet used to track how Fed actions (like an OMO) change assets and liabilities for both the Fed and banks.

Nonborrowed Reserves

Reserves supplied to the banking system through the Fed’s open market purchases.

Borrowed Reserves

Reserves created when banks proactively borrow from the Fed’s discount window.

Ample Reserves Framework

The modern system where the Fed supplies a massive amount of reserves, relying on administered rates (IORB) rather than quantity changes to control interest rates.

Stigma (Discount Window)

The reluctance of banks to borrow from the Fed for fear that the market will perceive them as financially weak.

SOFR (Secured Overnight Financing Rate)

A broad measure of the cost of borrowing cash overnight collateralized by Treasury securities; a market-based alternative to the FFR.

Repo Agreement (Repurchase)

A temporary OMO where the Fed buys securities with an agreement to sell them back, injecting liquidity for a short period.