The-Fed-and-Monetary-Policy.ppt

Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Click to edit Master title style,CHAPTER,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Click to edit Master title style,4,The Fed and Monetary Policy,Chapter Objectives,Identify the components of Fed and its role in monetary policy,Describe the tools the Fed uses to influence monetary policy,Explain how changes in regulation in the 1980s affected the Fed and monetary policy,1.Federal Reserve System:Third U.S.Central Bank,First Bank of the United States(17911811)-oversee the commercial banking system and maintain a stable economy,Second Bank of the United States,(18161836)-1907 financial panics,Federal Reserve System(1913),Structure of the Federal Reserve System,12,Fed District Banks,Member Commercial Banks,7,Members of Board of Governors(,14,year terms for Governors),12,Open Market Committee(FOMC)Members,Advisory Committees to Fed from private sector,Functions of the Federal Reserve System,Effect Monetary Policy,U.S.Central Bank In International Area,Fiscal Agent of U.S.Treasury,Facilitate Efficient Payments System,Regulate Banks and Bank Holding Co.,Enforce Consumer Credit Laws,1.1 Organization of the Federal Reserve-district banks,Federal Reserve District Banks,12 districts,Districts divided by population at 191213,District bank size related to economic wealth of district,District banks owned by private member banks(through purchase stock),The top-three district banks(according to its asset scale)are New York,Chicago,San Francisco(they own more than 50%assets of federal reserve system),1.1 Organization of the Federal Reserve-district banks,Federal Reserve District Banks,Board of Directors of district banks,Three appointed by Board of Governors,Three professional bankers,Three business persons in district,Functions:clearing checks,replacing old currency,providing loans,collect economic data and conduct research,New York district bank,1.3 Organization of the Federal Reserve-board of governors,Board of Governors has two main functions:,Regulate commercial banks,Supervise and regulate member banks and bank holding companies,Oversight of,12,Fed district banks,Establish consumer finance regulations after Congressional legislation,Setting credit controls(margin requirement P89),1.3 Organization of the Federal Reserve-board of governors,Establish and effect monetary policy,Direct control over two tools of monetary policy,Set reserve requirements,Approve discount rate set by district banks,Indirect control in a third area,Governors are members of the Federal Open Market Committee,1.4 Organization of the Federal Reserve-FOMC,Federal Open Market Committee(FOMC)meets every,6,weeks,12,members,7,from the Board of Governors,President of the New York Fed,4,other district bank presidents appointed on a rotating basis,Other presidents participate but do not vote on monetary policy matters,The chairman of the board of governors serves as chairman of the FOMC,1.4 Organization of the Federal Reserve-FOMC,Federal Open Market Committee(FOMC),Monetary policy goals of:,high employment,price stability,economic growth,Make monetary policy decisions(meets about every six weeks)to achieve goals,Forward decisions to N.Y.Fed open market desk(Trading desk or open market desk),1.5 Organization of the Federal Reserve-advisory committees,Advisory committees from private sector also are a part of overall structure of the Fed,Member is elected each year from 12 district bank,Meets at least four times one year in W,D.C.,See Exhibit 4.2(P91),Feds Influence on Economy,Fed influences liquidity(supply of loanable funds)in money market to influence:,Liquidity,Money Supply,and,Interest Rates,Business and Consumer,Borrowing/Spending,Goals of,Growth,Price Stability,Job Growth,2.Tools of Monetary Policy,Tools of,Monetary,Policy,Open,Market Op.,Reserve Req.,Discount,Rate,How Fed Controls Money Supply,Banks must maintain reserves as percent of deposits,Reserves kept as deposits in Fed(plus vault cash),Fed controls level of member bank reserve deposits in Fed,Fed influences bank deposit portion of money supply,2.1 Monetary Policy Tools-open market operation,FOMC Meeting procedure,Sent Beige(Green,Blue and gray)Book(report of regional economic conditions in each 12 districts),Presentations by staff member about current economic conditions and economic trend,Each FOMC member offers recommendations,Making voting(money supply and interest rate target),Forward the decision(a target growth rate range and federal funds rate)to Trading Desk-policy directive,2.1 Monetary Policy Tools-open market operation,Open market operations involve the purchase or sale of government securities based on FOMC directives sent to N.Y.Fed Trading Desk,Open market purchase of government securities:,Purchase securities from government securities dealers,Increase bank deposits and bank reserves,money market liquidity and,in time,Increases the money supply,2.1 Monetary Policy Tools-open market operation,Open market operations and interest rates,Most rates are market determined but Fed,influences,federal funds interest rate,Fed purchase of securities results in an injection of additional funds into the bank system,Shifts supply of federal funds to the right,Lowers federal funds rate,Lower rates spread to other money market securities,More funds available for money market and bank lending,2.1 Monetary Policy Tools-open market operation,How open market operations affect interest rates?,Dynamic open market operation are implemented to increase and decrease the level of funds.,Defensive open market operation offset the impact of other conditions that affect the level funds,Explain the example.,2.1 Monetary Policy Tools-open market operation,Beige Book,more formally called the,Summary of Commentary on Current Economic Conditions,is a,report,published by the,Federal Reserve Board,eight times a,year.,Each report is a gathering of,“,anecdotal,information on current economic conditions,”,by each,Federal Reserve Bank,in its district from“Bank and Branch directors and interviews with key business contacts,economists,market experts,and other sources.”,2.1 Monetary Policy Tools-open market operation,Federal funds rate,In the,United States,the,federal funds rate,is the,interest rate,at which private,depository institutions,(mostly banks)lend balances(,federal funds,)at the,Federal Reserve,to other depository institutions,usually overnight.Changing the target rate is one form of,open market operations,that the,Chairman of the Federal Reserve,uses to regulate the,supply of money,in the,U.S.economy.,2.2 Monetary Policy Tools-discount rate,Adjusting the discount rate,The discount window offers depository institutions three types of credit:,Adjustment credit for short-term reserve deficiencies,Seasonal credit to agricultural banks,Extended credit for longer-term liquidity problems of problem banks,Lower discount rate,More bank borrowing from Fed,bank reserves expand,money supply increases,2.2 Monetary Policy Tools-discount rate,See exhibit 4.3,Suggests that a change in the discount rate by the Fed may serve as a signal for future changes in the federal funds rate and other market-determined interest rates,2.3 Monetary Policy Tools-requirement ratio,Adjusting the reserve requirement ratio,Proportion of deposits at depository institutions set aside to meet their reserve requirements,Increase in lending or expansion limited by($)reserves bank must hold the meet reserve requirements(%),Total dollar expansion effect as follows:,Dollar amount of open market,Fed purchase or discount loan,1,RR,Exhibit 4.4,a,a,a,$100 million,$90 million,$81 million,$10 million,$9.0 million,$8.1 million,Increase in,deposits,at banks,Required reserves,held on,new deposits,Funds received from,new deposits that,can be lent out,$90 million,$81 million,$72.9 million,2.4 Comparison of Policy Tools,Increasing the money supply,Open market operation purchase of securities via the Trading Desk in the secondary market,Discount rate lowered to encourage borrowing at the discount window,Reserve requirements lowered,2.4 Comparison of Policy Tools,Decreasing the money supply,Open market operation sale of securities via the Trading Desk in the secondary market,Discount rate raised to encourage borrowing at the discount window,Reserve requirements raised,2.5 Fed Control of the Money Supply,Select standard:be controllable by Fed and have predictable impact on economic variables,M1,M2 and M3(M2 and M3 are more reliable measures for monitoring and controlling the money supply),See Exhibit 4.6 and 4.7(saving habit and consumer habit),2.5 Fed Control of the Money Supply,MMDA(MMA)-a savings account that offers the competitive interest rate(real rate)in exchange for larger-than-normal deposits.MMDA place restrictions on the amount of transactions you can make in a month.Furthermore,you usually have to maintain a certain balance in the account to receive the higher interest rate.,2.6 Limiting Factors to Money Supply-Deposit Expansion,Banks may not lend excess reserves,Public may not re-deposit payments in expansion process(cash drains),Lowers deposit expansion multiplier,Other fed functions impact member bank reserve level,Federal Reserve Policy Emphasis,Money Supply Growth,Interest Rate Levels,Price Level Changes,Real Economic Activity,3.Monetary Control Act of 1980,To regain more control over the money supply the MCA required all depository institutions to,Meet the same reserve requirements,Hold noninterest-bearing reserves,Promptly report deposit levels to the Fed,Other provision of the MCA allowed all depository institutions,To offer transaction accounts,Access to the discount window,4.Global Monetary Policy,Each country has its own central bank and often industrialized countries have banks with similar goals,Integration in the global economy means the Fed must consider conditions in other countries when looking at the U.S.economy,Central banks try to work together but conflicts of interest can make cooperation difficult at times,Global Monetary Policy,A single European monetary policy,Euro replaced national currencies of 11 countries in January 1999,National currencies withdrawn and replaced by euro by June 1,2002,Countries of the 15 in the European Union needed to meet economic criteria and chose to join,Created a European Central Bank,