Central Banks and the Federal Reserve System

Vocabulary practice flashcards covering the structure, entities, historical origins, governance, and independence of the Federal Reserve System and comparative central banks from Mishkin's Financial Markets and Institutions, Chapter 9.

Second Bank of the United States

A central bank abolished in 1836 by President Andrew Jackson; nationwide financial panics in 1873, 1884, 1893, and 1907 might have been avoided had it remained to serve as a lender of last resort.

Panic of 1907

A financial crisis resulting in widespread bank failures and substantial losses to depositors that finally convinced the American public that a central bank was needed to prevent future panics.

Federal Reserve System

The central banking system of the United States, established with a decentralized structure and checks and balances due to Americans' fear of centralized power and distrust of moneyed interests.

Board of Governors of the Federal Reserve System

The seven-member governing body of the Fed appointed by the U.S. President and confirmed by the Senate to 14-year terms; it sets margin requirements, effectively sets the discount rate, and establishes reserve requirements.

Chairman of the Board of Governors

The primary spokesperson for the Federal Reserve who serves a four-year term not coincident with the U.S. President's term and exercises substantial control by setting the agenda for both the Board and the FOMC.

Federal Open Market Committee (FOMC)

The Fed entity responsible for determining monetary policy strategy; it consists of seven Board members and five regional Federal Reserve Bank presidents, meets roughly every six weeks, and directs open market operations.

Federal Reserve Bank of New York

The most important of the twelve regional Fed banks, holding approximately 25 percent of the system's assets, whose president permanently votes on the FOMC and whose trading desk conducts open market operations.

Class B Directors

Three directors of a district Federal Reserve Bank who are prominent leaders elected by member banks to represent industry, labor, agriculture, or the consumer sector.

Federal Advisory Council

A component entity of the Federal Reserve System that includes one selected commercial banker from each of the twelve Federal Reserve districts.

Nationally Chartered Banks

Commercial banks chartered by the federal government that are legally required to be members of the Federal Reserve System.

Member Commercial Bank Stock

Stock in district Federal Reserve banks purchased by member commercial banks, which pays an annual dividend legally capped at six percent.

Depository Institutions Deregulation and Monetary Control Act of 1980

Federal legislation supported by the Fed partly due to declining membership concerns; it made all depository institutions subject to Fed-set reserve requirements, regardless of membership status.

Banking Legislation of the Great Depression

Laws passed during the 1930s that effectively transferred power within the Federal Reserve System from regional banks to the Board of Governors.

Instrument Independence

The central bank's freedom from political pressure regarding how it uses and adjusts the tools of monetary policy.

Goal Independence

The central bank's ability to set the macroeconomic goals of monetary policy free from political pressure or statutory mandates.

Political Business Cycle

Economic fluctuations created when politicians pursue expansionary policies just prior to an election to lower unemployment and interest rates, followed by contractionary measures post-election.

Inflationary Bias

The tendency of politically controlled monetary policy to emphasize short-term employment and low interest rates at the expense of long-run price stability.

Theory of Bureaucratic Behavior

An economic theory positing that a government agency acts to maximize its own welfare—seeking increased power, prestige, and autonomy while avoiding blame and public conflict.

Bank of England

The oldest central bank among major nations, originally established in the year 1694.

European Central Bank (ECB)

The central bank established in January 1999 for member countries of the European Monetary Union, possessing the highest degree of independence among central banks.

Margin Requirement

The minimum fraction of the purchase price of securities that an investor must pay for with cash, set by the Board of Governors of the Federal Reserve.

Discount Rate

The interest rate established by the regional Federal Reserve banks and approved or effectively determined by the Board of Governors on loans granted to commercial banks.

November 2007 Communication Enhancements

Changes made to the Fed's communication policy that increased FOMC economic projection releases from two to four times a year, expanded the forecast horizon to three years, and provided narrative outlooks.