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Federal Reserve System

FNCE 4P08
by

Jordan DeBrincat DeBrincat

on 6 November 2012

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Transcript of Federal Reserve System

The Federal Reserve System
"The Fed" Tahnee Simon
Jordan DeBrincat
Bryan Schiedel Origin Created in 1913
Most important central bank
The Federal Reserve Act of 1913 Objective To disperse power along regional lines
Provide a safer, more flexible and stable system Federal Reserve Banks 12 Federal Reserve districts with one main Federal Reserve Bank each
New York, Chicago, and San Francisco are the largest
Quasi-public institutions
Each bank has nine directors
placed into A, B, & C categories Importance of New York Federal Reserve Bank 1. Largest commercial bank in the U.S.
2. Involvement in bond and Foreign Exchange Markets
3. Member of BIS
4. Only permanent voting member of FOMC Involvement in Monetary Policy 1. Establish the discount rate
2. Decides which banks receive loans
3. Selects bankers to serve on the Federal Advisory Council
4. Votes on the Federal Open Market Committee Member Banks All national banks (2800) required to be apart of the Fed
Commercial banks can join
Equal reserve requirements
On-site examinations once a year Federal Advisory Council 12 representatives that advise the Board
Meet four times a year in Washington, D.C.
Members chosen every year from each Reserve Bank Board of Governors Includes seven members, plus Chairman with headquarters in Washington D.C.
Main responsibility is monetary policy
Majority Vote at FOMC meetings
Large research staff
Has bank regulatory functions Current Board of Governors Members Federal Open Market Committee (FOMC) Meets eight times a year regarding open market operations
Includes 7 Board of Governors, president of New York Reserve Bank, and four other Reserve Bank Presidents
Focal point for policy making
Does not carry out purchases or sales of securities FOMC Meeting Includes all bank presidents, directors, and related personnel
First discussion led by manger of system open market operations
Second is a presentation of Board Staff's national economic forecast
Meeting ends with monetary policy and domestic policy discussion Independence of the Federal Reserve Instrument dependance
Goal dependance
Minimal political pressure
Long non-renewable terms
Majority of earnings returned to Treasury
Free from auditing Federal Reserve Political Pressures Congress makes legislation changes
U.S. president can influence the Federal reserve
They can influence congress who can influence the Federal Reserve
President appoints BOG members and chairman Importance of the Chairman of the Board Spokesperson for the Federal Reserve
Sets agenda of Board and FOMC meetings
Influences the board by stature and personality
Supervises the Board's staff European Central Bank (ECB) In 1999, the Euro and ECB launched
ECB located in Frankfurt Germany
ECB replaced the Fed as the most independent bank in the world FED & ECB Similarities
Executive board has similar structure to Board of Governors
Governing council similar to FOMC Differences
Each Euro National Central Bank controls its own budget and conducts monetary operations
ECB does not supervise and regulate financial institutions Should the Fed be Independent? Cases in favour of Independence
Political pressure can cause an inflationary bias to monetary policy
Monetary policy is too important to leave to politicians
Countries with more independent banks have lower inflation Cases against Independence
Undemocratic
Lack of accountability
Monetary and Fiscal policy must be coordinated Moral Hazard at Fed Fed assuming role of "Bad Bank"
Acquired assets of failing or declining companies
Loaned billions of dollars to foreign and domestic banks as "emergency loan program" during recession Thank you for listening Any Questions? References http://www.frbsf.org/education/activities/drecon/2001/0105.html Harvard Business Review: The Moral Hazard Economy. Jul/Aug2009, Vol. 87 Issue 7/8, p101-103 http://www.federalreserve.gov/ Mishkin, F. S., & Eakins, S. (2011). financial markets and institutions. (7th ed.). Boston, MA: Pearson Education Inc. Current Responsibilities 1. Conducting monetary policy by influencing money and credit conditions
2. Supervising and regulating banks
3. Maintaining stability of the financial system
4. Providing services to U.S. government http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/ Monetary Policy Actions undertaken by a central bank to influence the availability and cost of money and credit to help promote nation economic goals
Three tools of monetary policy: open market operations, the discount rate, and reserve requirements FOMC's Transparency Increase in the amount of information that is disclosed
Started with publishing collective forecasts
Recently have gone a step further and announced the sharing of federal funds rate Structure http://www.forbes.com/sites/bobmcteer/2012/01/03/through-the-fomcs-looking-glass-an-orgy-of-transparency/ The Fed's Involvement in Financial Crisis "How Bernanke's Fed triggered the Great Recession" - Wall Street Journal "Don't Blame Greenspan" - Forbes VS http://www.forbes.com/sites/richardsalsman/2011/07/17/how-bernankes-fed-triggered-the-great-recession/2/ http://online.wsj.com/article/SB123811225716453243.html
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