Federal Reserve

limited reserves

banks deposit few reserves w/ central bank; small changes in the MS can affect interest rates; the central bank conducts monetary policy by changing the reserve req or the discount rate or by using open market operations

ample reserves

reserves are abundant; req. ratio is 0, change the MS no longer affect IR; traditional tools can't be used; graph does not apply anymore

Interest on Reserves (IOR)

the IR that the federal reserve pays commercial banks to hold reserves

what the fed pays banks for holding $$ at the Fed

discount rate

interest rate the federal reserve charges commercial banks to borrow money

administered rates

interest rates set by the Fed rather than determined in a market

administrated rates --> fed funds rate --> nominal interest rates

More loans vs less

More loans decrease interest rates

Less loans increase interest rates

Goal of expansionary monetary policy

Decrease interest rates, encourage borrowing and spending, stimulate economic growth

open market operations with ample reserves

used to maintain the supply of reserves

reserve market model

discount rate = what the fed charges banks for loans

Q1 = amount of reserves w/ the central bank

Q1 and discount rate meeting point = fed. funds rate

Supply of reserves

set by the fed

Q1 = amount of reserves w/ the central bank

expansionary policy

decrease administered rates

contractionary policy

increase administered rates

monetary policy tools used with ample reserves

banks deposits a lot of reserves w/ the central bank; change the MS has little or no effect on interest b/c surplus of $ (in reserves); central bank conducts monetary policy by change its administered rates (IOR or discount rate)

3 primary responsibilities of the Fed

1. Monetary policy (and central banking)

2. Financial services

3. Bank supervision and regulation

Bank regulation

involves setting the rules by which financial institutions operate, including their formation and activities

Bank supervision

involves monitoring and examining regulated financial institutions to help ensure that they comply with laws and rules

The Federal Reserve

A bank for banks

We go to: Wells fargo

Wells fargo goes to: The Fed

NOT a government agency

Importance of the Federal Reserve

Keeps monetary policy flowing and low inflation + ensures the safety and soundness of the nation’s banking system

Board of Governors

7 members appointed by the President and confirmed by the Senate

Oversees the Federal Reserve System, sets policies, and regulates financial institutions

Monetary Policy

Uses tools like setting interest rates and adjusting reserve requirements to support economic growth, control inflation, and stabilize prices

Financial services

Provides essential banking services to financial institutions and the federal government

Processes payments, clears checks, and facilitates the electronic transfer of funds

Serves as the “lender of last resort”

How often does the FOMC meet?

Every 6 weeks

The Federal Funds Market

Market in which banks borrow and lend reserve deposits

Federal Funds Rate

Interest rate banks pay when borrowing reserves from other banks

Goal of contractionary monetary policy

Increase interest rates, reduce spending and investment, curb inflationary pressures