Chapter 13: Central Banks and the Federal Reserve System Flashcards
What does the Central banks affect?
interest rates, the amount of credit available, and the money supply
how many districts are there for the Federal Reserve
12
what are the three largest Federal Reserve Banks?
San Franciso, New York, Chicago
Is the Federal Reserve private or public?
both, it is owned by private commercial banks and by the government
member banks
commercial/national banks that are members of the Federal Reserve System
How many directors does each Federal Reserve bank have and who appoints them?
each district has 9
- 6 appointed by member banks
- 3 appointed by Board of Governors
classification of directors and what they mean
3 A directors - elected by member banks, professional bankers
3 B directors - elected by member banks, prominent leaders from industry
3 C directors - elected by Board of Governors to represent public interest
Which banks are required and not required to be members of the Federal Reserve System?
- all national banks are required to be members of the Federal Reserve System
- Commerical banks charted by the states are not required to be members
Board of Governors
the head of the Federal Reserve System that is made up of seven members
- usually professional economists
- required to come from different districts
Who appoints the governors?
Each is appointed by the president of the US and confirmed by the Senate
How long do the governors serve?
one full nonrenewable 14-year term plus part of another term
- one governor’s term expires every other January
the chair of the Board of Governors
chosen from among the seven governors
how long does the chair of the Board of Governors serve?
4 years (renewable)
Federal Open Market Committee (FOMC)
meets eight times a year (about every six weeks) and makes decisions regarding the conduct of open market operations, setting the policy of interest rate, the federal funds rate, and the setting of the interest rate paid on reserves
- also called the Fed
Who makes up the FOMC?
- 7 members of the Board of Governors
- president of the Federal Reserve Bank of New York
- the presidents of four other Federal Reserve Banks
Who is the chair of the FOMC?
the chair of the Board of Governors
tighening of monetary policy
a rise in the federal funds rate and the interest rate paid on reserves
easing of monetary policy
a lowering of the federal funds rate and the interest paid on reserves
what are the two types of independence of central banks?
instrument independence and goal independence
instrument independence
the ability of the central banks to set monetary policy instruments
goal independence
the ability of the central bank to set the goals of monetary policy
Who threatens the Federal Reserve’s independence?
Congress
The case of leaving the Federal Reserve independent
subjecting it to more political pressure would impart an inflationary bias to monetary policy
- leads to political business cycle
- An independent Fed is better able to resist this pressure from the Treasury
- the control of monetary policy is too important to be left of politicians
- An independent Fed can pursue policies that are politically unpopular yet ultimately in the public interest
political business cycle
just before an election, expansionary policies are pursued to lower unemployment and interest rates
After the election, high inflation and high interest rates
The case against the Federal Reserve’s independence
- undemocratic to have monetary policy, controlled by an elite group responsible to no one
- lack of accountability
- Only by placing monetary policy under the control of the politicians
who also control fiscal policy can these two policies be prevented from working at cross-purposes - an independent Fed has not always used its freedom successfully
theory of bureaucratic behavior
the objective of a bureacracy is to maximize personal welfare which is realted to its power and prestige
Dove
- Want low ST interest rates
- focus on economy/flow/main street (factories, business)
Hawk
- Want high ST interest rates
- focus on capital/stock/Wall Street (finance)
What are the beliefs of Doves?
- believes slack exists in labor market and capital stock so keep rates lower for longer
- Discretion is needed b/c “This time is different”
- risk losing inflation-fighting credibility
- supports pro-growth agenda
- pro Fed independence
- steeper yield curve
What are the beliefs of Hawks?
- believes Fed is behind the inflation curve so act preemptively to prevent economy overheating (if increase in AD > increase in AS then Change P/P > 2% target )
- Fed should follow “Rule-based policy”
- reinforce inflation-fighting credibility
- counter pro-growth agenda
- Congress reviews monetary policy decisions
- flatter yield curve
four players in the money supply process
- Central Bank
- Banks
- Depositors
4 Borrowers from banks
Reserves
- vault cash + deposits at Fed Res
- Required Reserves + excess reserves
monetary liabilities
currency and reserves in Fed. Res
monetary base
Currency + Reserves
How are the Regional Federal Reserve Banks involved in the conduct of monetary policy?
- establish discount rate, decide who can obtain the loan, and administer them
- clearing checks
- 5 of the bank presidents are in FOMC
- issue new currency and withdrawal damaged currency
- evaluate mergers
- act as liaisons between the business community and the Fed
- examine bank holding companies and state-chartered member banks
- collect data on local business conditions
- use staff to research topics related to the conduct of monetary policy
How are the Board of Governors involved in the conduct of monetary policy?
- in FOMC
- set reserve requirements
- set interest rates on reserves
- controls fixed amount by which the discount rate exceeds the fed funds rate target
- the chair of the Board advises the president of the US, speaks to Congress and the media
- sets margin requirements
- sets salary pf president and officers of each Federal Reserve Bank
- approves bank mergers and applications for new activities
- hires staff to provide economic analysis
How are the FOMC involved in the conduct of monetary policy?
- set feds fund rate
- oversees open market operations
