3. Central Banks Flashcards
What do actions of Central Banks affect?
Interest rates, money supply, amount of credit
–> all impact financial markets, aggregate output, and inflation
When was the Fed created?
1913
What were the sources of resistance to the formation of a central bank in the US?
- Fear of centralized power
2. traditional American distrust of moneyed interest, hostility of banks and centralized power
What are the main entities of the Fed?
The chair
Board of governors
Federal open market committee (FOMC)
Federal reserve banks
What is the role of the chair of the fed?
- chosen by US president among the board of governors
- 4-year terms, may be renewed
- Represent the Fed
- Preside over board of governors and the FOMC
What is the role of the board of governors (Fed)?
- 7 members
- comprises, Chair, vice-chair and 5 other members
- each governor is appointed by president and approved by the senate
- Can only serve one 14-year term to limit power of president
Responsibilities:
- set reserve requirements, how much the banks are required to hold
- determine interest on the reserves, rate that fed pays commercial banks
- approve or disapprove discount rates made by FRBs
What is the role of the Federal Open Market Committee (FOMC)?
FOMC is main policy making body
-12 voting members (7 members of Board of governors, President of FRB NY, and four other president of other FRBs)
- Meets every 6 weeks to make decision on open market operations (bond buying program)
What is the role of the Federal Reserve Banks? (FRB)
- 12 federal reserve districts, operational arms
- 3 largest in terms of assets are NY, Chicago, San Francisco
- Directors decide on discount rates
- Serves as banker’s bank and government’s bank
How do the FRBs serve the Government?
- Issue new currency and destroy old, worn currency
- Maintain U.S. treasury’s bank account and process electric payments
- Manage US treasury’s borrowings (issue, transferring, redeeming US treasury bonds, notes and bills)
How do the FRBs serve the banks?
- Hold deposits for banks in the district
- Operate and ensure integrity of a payments network for transferring funds
- make funds available to commercial banks in district
- Supervise and regulate financial institutions and evaluate proposed bank mergers
- collect and make available data on business conditions
Why is the FRB of New York special?
- It contains many of the largest banks in the US.
- Houses the open market desk. Is involved in treasury securities and conducts foreign exchange intervention
- Only FRB to be member of Bank for International Settlements (BIS). Regular meetings with other Central banks
- Has the greatest amount of Gold, more than Fort Knox
- President of NY FRB is the only permanent member of the FOMC
What are the goals of the Fed?
Promote strong US economy
Congress has directed Fed to 3 goals
- Maximum sustainable employment
- Stable prices
- moderate long-term interest rates
achieves this by controlling interest rates and general financial conditions
What are the main entities of the ECB?
- The president
- Executive board
- Governing council
- National central banks
- General Council
What is the role of the president of ECB?
Chairs executive board, governing council, and general council.
Represents ECB and ESCB
Appointed by European council for non-renewable 8 year term
What is the role of the executive board of the ECB?
Similar to board of governors:
implement monetary theory formulated by the governing council
6 members, president, vice-president and 4 others
