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    Chapter Four: The Federal Reserve System, Monetary Policy, and Interest Rates

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    It is related to the federal reserve system

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    Chapter Four: The Federal Reserve System, Monetary Policy, and Interest Rates

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    Hamid Khurshid
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    It is related to the federal reserve system

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    The federal reseve system

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    It is related to the federal reserve system

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    © All Rights Reserved
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    Download as ppt, pdf, or txt
    92 views13 pages

    Chapter Four: The Federal Reserve System, Monetary Policy, and Interest Rates

    Uploaded by

    Hamid Khurshid
    It is related to the federal reserve system

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 13

    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

    McGraw-Hill /Irwin
    Chapter Four
    The Federal Reserve
    System, Monetary Policy,
    and Interest Rates
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Major Duties and Responsibilities
    of the Federal Reserve System
    Conducting monetary policy
    Supervising and regulating depository
    institutions
    Maintaining the stability of the financial
    system
    Providing payment and other financial services
    to the U.S. government, the public, FIs and
    foreign official institutions
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Structure of the Federal Reserve
    System
    12 FR Banks plus 10 branches located in
    major U.S. cities
    A 7-member Board of Governors in
    Washington, DC
    The Federal Open Market Committee
    (FOMC)
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Functions Performed by the Federal
    Reserve Banks
    Assistance in the Conduct of Monetary
    Policy
    Supervision and Regulation
    Government Services
    New Currency Issue
    Check Clearing
    Wire Transfer Services
    Research Services
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Locations of FR Banks and Branches
    Banks located in Atlanta, Boston, Chicago,
    Cleveland, Dallas, Kansas City, Minneapolis, New
    York, Philadelphia, Richmond, San Francisco and
    St. Louis
    Branches located in Baltimore, Birmingham,
    Buffalo, Charlotte, Cincinnati, Denver, Detroit, El
    Paso, Helena, Houston, Jacksonville, Little Rock,
    Los Angeles, Louisville, Memphis, Miami,
    Nashville, Oklahoma City, Omaha, Pittsburgh,
    Portland Salt Lake City, San Antonio, Seattle
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Board of Governors
    Headquartered in Washington, DC
    Each of 7 members appointed by the president of the
    United States and confirmed by the Senate
    Board members serve nonrenewable 14-year terms
    President designates two members to chairman and vice-
    chairman for four year terms
    Primary responsibilities are the formulation and conduct
    of monetary policy and the supervision and regulation of
    banks
    Chairman advises President on economic policy and
    serves as spokesperson for the FR system
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Federal Open Market Committee
    (FOMC)
    The major monetary policy-making body of the FR
    System
    Main responsibilities are to formulate policies to
    promote full employment, economic growth, price
    stability, and a sustainable pattern of international
    trade
    Open market operations--the purchase and sale of
    U.S. government and federal agency securities
    Sets ranges for growth of monetary aggregates and
    directs the FR in foreign exchange markets
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Balance Sheet of the Federal Reserve
    (in billions of dollars)
    Assets Liabilities and Equity

    Gold and foreign exchange $ 27.1 Depository institution reserves $ 21.7
    SDR certificates 7.2 Vault cash of commercial banks 41.0
    Treasury currency 27.4 Deposits due to federal government 6.7
    Federal Reserve Float 0.1 Deposits due to rest of the world 1.3
    FR loans to domestic banks 0.5 Currency outside banks 503.0
    Security repurchase agreements 22.1 Miscellaneous liabilities 8.6
    U.S. Treasury securities 489.0 FR Bank stock 7.6
    U.S. government securities 0.2
    Miscellaneous assets 16.3

    Total assets $589.9 Total liabilities and equity $589.9
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Objective of Money Policy
    To influence the amount of reserve in the
    banking system
    which affects interest rates and availability of
    credit and
    ultimately affects the levels of employment,
    output, prices and inflation
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Monetary Policy Tools
    Open Market Operations
    primary determinate of changes in excess reserves in
    the banking system impacting the size of the money
    supply and/or interest rates
    The Discount Rate
    the rate of interest FR Banks charge on emergency
    loans to depository institutions
    Reserve Requirements
    determine the minimum amount of reserve assets that
    depository institutions must maintain by law to back
    transaction deposits held as liabilities
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Impact of Monetary Policy
    on Various Economic Variables
    Expansionary
    Activities
    Contractionary
    Activities
    Impact on
    Reserves
    Credit availability
    Money supply
    Interest rates
    Security prices
    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    Alternate Monetary Policy Foci
    Interest
    Rate
    Quantity of Money
    (in billions)
    i

    i*

    i
    M
    S

    M
    D

    M
    D

    M
    D

    Interest
    Rate
    Quantity of Money
    (in billions)
    i* = 6%

    i= 5%
    M
    S
    M
    S

    M
    D

    M
    D

    M
    D

    Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill /Irwin
    International Monetary Policies
    and Strategies
    Foreign Exchange Intervention
    commitments between countries about the
    institutional aspects of their intervention in
    the foreign exchange markets
    similar to open market purchases and sales
    of Treasury securities

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