Federal Reserve System
The Fed
is this country’s “central bank”
(like Bank of England, Bank of Japan, etc.)
Chief
purpose: to conduct monetary policy
Serves as
(government’s) Treasury’s bank
Serves as
banking system’s bank
Privately
owned, but not privately controlled
Serves as
financial system regulator (limited duties)
Board of Governors—the Fed’s chief governing body
Number
of Governors: 7
How
does one become a Governor?
Appointed
by President; confirmed by Senate
Length
of appointment: 14 years (staggered terms)
Membership conditions/restrictions
No
two Governors from same Reserve district
Cannot
be re-appointed to second full term
(but may be
appointed to full term after serving out
an unexpired
term—thus possible to serve more than
14 years, though rarely done)
(Generally)
cannot be fired from Board
CEO of the System
Designated
by President
4
year term as Chairman
Can
be re-appointed Chairman
Chief
duty/function:
draws
up policy directive—sets course of monetary policy
Number
of members: 12
Membership: 7 Governors
5 Reserve Bank
presidents
(NY;
Cleve/Chicago; Dallas/St.L./Atlanta; etc)
Meets—about
every 6 - 8 weeks
Role is strictly
advisory (relatively unimportant)
12
members—one from each Federal Reserve district
Appointed
by district Federal Reserve banks
No
significant policy-making powers
12
F.R. banks—most have branches
Each
has nine member Board of Directors
6
elected by member banks
3
appointed by Board of Governors
Directors
select Bank President (who runs bank, serves 5 year term)
(All
important “decisions” by Directors subject to approval
of Board of Governors—thus little real power)
Long
terms, conditions of service make Fed less politically dependent
than most regulatory/policy making agencies in U.S.
Not
having to rely on Congress/President for budget makes Fed
considerably less politically dependent than other agencies
Congress
can amend Federal Reserve Act—so how independent?
What
seems to be the major advantage of a central bank that is
politically independent?
General Monetary Control Instruments
1. Reserve requirement policy
Reserve requirement set by Board of
Governors
Reserves held against deposits of banks (Fed
sets percent)
Reserves may be held as deposits at Fed or
bank vault cash
Least often used tool for changing monetary
conditions
Effect of change in reserve requirement
considered too
sudden, too blunt. Increase could
cause hardship on
banking system. Reserve
requirements a form of tax
on banks—in that banks do not earn interest on reserves
2. Discount rate policy
Discount rate—interest rate that Fed
charges banks when they
must borrow reserves from Fed
Weakest and least certain impact of three
tools
Primary impact considered to be thru
“announcement effect”
3. Open market operations
Involves
buying and selling of securities (initiated by Fed)
By far,
the most important, most often used tool of monetary
policy—virtually the only tool today
All open
market operations go through New York Fed
When Fed
buys securities: bank reserves increase
When Fed
sells securities: bank reserves decrease