Chapter 4

The Federal Reserve System

• 3 Key Entities:

  • Federal Reserve Board of Govenors

  • 12 Fed Reserve Banks

  • Federal Open Market Committee

Designed to diffuse power along these dimensions:

• U.S Regions

• Government & Private Sector interests

• Needs of Bankers, Business, and the public

Banks are “Quasi-Public” meaning member banks elect 6 directors, and and 3 are appointed by govenors.

Federal Reserve Bank Functions

Nationally chartered banks are required to be members

State commercial banks may elect to join

Board of Govenors

• Seven Govenors

• Appointed by president, confirmed by senate

• serve 14-year non renewable terms on a rotating schedule

The Chairman

• Spokesperson for entire system

• supervises board’s staff

• negotiates as needed with congress & president

Federal Open Market Committee (FMOC)

• Most important part of the system

• Make decisions regarding open market operations to influence the monetary base

• Chairman of BOG is the chair of this committee

• Open Market Operations is a tool the Fed has to control money supply

• All actions are directed to the Fed Reserve Bank of New York

Hawks focus on inflation

Doves focus on people & unemployement

FED Open market purchases increase money supply

FED Open market selling, removes money from the system.

Policy Tools:

Discount Lending

• Discount loans leads to expansion of reserve which can be lent out as deposits

Three types of discount loans

• Primary: healthy banks borrow as they wish

• Secondary: for banks with liquidity problems

• Seasonal: designed for small regional banks that have seasonal patterns

Open Market Operations

• Purchase/Sale of bonds in the open market

• most important policy took

• open purchase (sell), results in expansion