- federal reserve wire (fedwire) DIRECT - automated clearing house (ACH) INDIRECT - fednow (near-instant transfer, 24/7) DIRECT

Chapter 4 Flashcards by alyssa james

Banks that determine, implement, and control the monetary policy in their home countries.

central banks

How well did you know this?

Not at all

Perfectly

The major monetary policy-making body of the Federal Reserve System.
- 12 members:

– 7 members of board of governors
– President of the NY district bank
– 4 other district presidents (rotating)

federal open market committee (FOMC)

How well did you know this?

Not at all

Perfectly

Purchases and sales of U.S. government and federal agency securities by the Federal Reserve.

open market operations

How well did you know this?

Not at all

Perfectly

Federal reserve bank president serve on the federal open market committee (FOMC), FRBs set and change discount rates

assistance in the conduct of monetary policy

How well did you know this?

Not at all

Perfectly

FRBs have ___ & ___ authority over the activities of banks and other large financial institutions located in their district

supervision and regulation

How well did you know this?

Not at all

Perfectly

FRBs write regulations to implement many of the major consumer protection laws and establish programs to promote community development and fair and impartial access to credit

consumer protection and community affairs

How well did you know this?

Not at all

Perfectly

FRBs serve as the commercial bank for the ____ ____

US treasury

How well did you know this?

Not at all

Perfectly

FRBs are responsible for the collection and replacement of ___ ___ from circulation

damaged currency

How well did you know this?

Not at all

Perfectly

The interest rate on loans made by Federal Reserve Banks to financial institutions.

discount rate

How well did you know this?

Not at all

Perfectly

Depository institutions’ vault cash plus reserves deposited at Federal Reserve Banks.

reserves

How well did you know this?

Not at all

Perfectly

Currency in circulation and reserves (depository institution reserves and vault cash of commercial banks) held by the Federal Reserve.

monetary base
(Also referred to as money base)

How well did you know this?

Not at all

Perfectly

Depository institutions’ vault cash plus reserves deposited at Federal Reserve Banks.

reserves

How well did you know this?

Not at all

Perfectly

total reserves can be classified into two categories:

(1) required reserves
(2) excess reserves

How well did you know this?

Not at all

Perfectly

The interest rate on short-term funds transferred between financial institutions, usually for a period of one day.

fed funds rate

How well did you know this?

Not at all

Perfectly

Statement sent to the Federal Reserve Board Trading Desk from the FOMC that specifies the daily amount of open market purchases or sales to transact.

policy directive

How well did you know this?

Not at all

Perfectly

provides payment and financial services to the US gov, the public, financial institutions, and foreign institutions
- clears checks, increasingly electronic

Federal reserve system

How well did you know this?

Not at all

Perfectly

4 entities of the Fed:

board of governors
federal reserve district banks
member banks
federal open market committee

How well did you know this?

Not at all

Perfectly

7 member board
president appoints with senate approval
members: nonrenewable 14 year term
chairman & vice-chairman: renewable 4 year terms

board of governors

How well did you know this?

Not at all

Perfectly

setting broad monetary policy
supervising and regulating banks

board of governors are in charge of: (2 things)

How well did you know this?

Not at all

Perfectly

in charge of:
- official banks of the US treasury
- execute monetary policy
- supervise and regulate member banks
- supervise & regulate non-member banks
- clear checks
- wire transfers

federal reserve district banks

How well did you know this?

Not at all

Perfectly

set discount rate for their district
make discount window loans to member banks
–discount loans: fereral reserve lends money to banks

execute monetary policy

How well did you know this?

Not at all

Perfectly

wire transfers: (3)

federal reserve wire (fedwire) DIRECT
automated clearing house (ACH) INDIRECT
fednow (near-instant transfer, 24/7) DIRECT

How well did you know this?

Not at all

Perfectly

Provides payment and financial services to the US government, the public, financial institutions, and foreign institutions
-Politically independent, providing long term safety and stability to the US financial system

The Fed

How well did you know this?

Not at all

Perfectly

Formulation & conduct of monetary policy and the supervision and regulation of banks
Set money supply & interest rate targets
Sets bank reserve requirements and reviews and approves the discount rates set by the 12 federal reserve banks

Board of governors Primary responsibilities

How well did you know this?

Not at all

Perfectly

- 12 regional branches - Supervised by board of governors - 9 directors for each.. (responsible for appointing the president of the FRB)

district banks

- Execute monetary policy - Supervise and regulate member banks - Supervise and regulate non-member banks - Official banks of the Us treasury - Issue and circulate currency - Clear checks - Wire transfers - Conduct economic research

district banks responsibilities

- Banks which hold stock in their district banks (required, non-transferable)

member banks

- Sets Fed Funds rate target - Uses open market operations to influence fed funds rate - Formulate policies to promote full employment, economic growth, price stability, and a sustainable pattern of international trade

FOMC responsibilities

Monetary Policy: Tools to increase or decrease the economy (3)

- discount rate - open market operations - reserve requirements

3 lending programs are offered through the Fed’s discount window:

- primary credit - secondary credit - seasonal credit

available to generally sound depository institutions on a very short-term basis (typically overnight) at a rate above the FOMC’s target rate for federal funds

Primary credit

available to depository institutions that are not eligible for a primary credit

Secondary credit

available to depository institutions that can demonstrate a clear pattern of recurring intra-yearly swings in funding needs

Seasonal credit

- The interest rate on loans made by Federal Reserve Banks to financial institutions. - A member bank borrows directly from the Fed - Little Monetary impact day-to-day - Generally only used during recessions/ crises

Discount lending (rate)

Interest rate banks charge each other for overnight loans

Fed Funds rate targeting

- FOMC directs the FRB Trading Desk at the NY District Bank to trade - The Trading Desk buys or sells US Treasury Securities until the Fed Funds rate is near its target

Open market operations

When the fed sells securities in the open market, it ____ banks deposits at the Fed

decreases

When the fed purchases securities in the open market, it ___ reserve accounts deposits at the Fed

increases

Determine the minimum amount of reserve assets (vault cash + bank deposits at fed banks) that depository institutions must maintain by law to back transaction deposit account held as liabilities on their balance sheet

Reserve requirements

Money Supply =

Currency * (1/Reserve Requirement)

Change in bank deposits =

(1/(New Reserve Requirement + c)*Change in Reserves

- Fed Funds target set to zero - Purchasing of ‘toxic’ assets - Guaranteeing of debt and lines of credit (to non-banks) - Quantitative Easing (purchasing Treasuries and MBSs)

2008 Financial Crisis

Established FDIC, separated commercial and investment banking

Glass-steagall act (1933)

- Treasuries - Agency securities - Gold & Foreign Currency - Mortgage-backed securities - Miscellaneous

Federal Reserve Balance Sheet: Assets

- reserves - money (monetary) base

Federal Reserve Balance Sheet: liability

Depository institutions reserve balances at the Fed plus vault cash

Reserves

Through FRBs Implement federal laws intended to protect consumers in credit and other financial transactions.

Consumer Protection

- Banks use this to make deposit and loan payments, to transfer book entry securities among themselves, and to act as a payment agents on behalf of large corporate customers - Large dollar payments

fedwire

Developed jointly by the private sector and the federal reserve system in 1970s and has evolved as a nationwide method to electronically process credit and debit transfer of funds

Automated clearinghouse (ACH)

Represent the Fed’s holding of securities (Largest asset)

Treasuries (issued by the US treasury)

- Monetary policy is generally only targeted at short term interest rates (OMO only utilize treasury bills) - Fed printed money and directly bought assets from banks (goal was to force cash into the economy)

Quantitative Easing

Federal Reserve payment settlements (4)

- government services - currency issuance - check clearing - wire transfer

The Fed operates a central check clearing system for the US banks, routing interbank checks to depository institutions on which they are written and transferring the appropriate funds from one bank to another.

Check clearing

An increase in the RR ratio means that depository institutions must hold ____ ____ against the transaction accounts (deposits) on their balance sheet.

more reserves

when the RR ratio increases: They are able to lend out a smaller percentage of their deposits than before → thus ___ credit availability and lending → leading to a multiple contraction in deposits and a ____ in the money supply.

decreasing; decrease

Expansionary Activities: Open market purchases of securities → reserve accounts of banks ____

increase

Expansionary Activities: Reserve requirement ratio decreases → increase in ___ ___

bank reserves

Expansionary Activities: Discount rate decreases → lowering of ___ ___ in the economy

interest rates

Contractionary activities: Open market sales of securities → reserve accounts of banks ___

decrease

Contractionary activities: Discount rate increase → interest rates increase in the ___ ___, making borrowing more ___

open market; expensive

Contractionary activities: Reserve requirement ratio increases → decrease in ___ ___ for all banks and limits the ____ of funds for additional loans

excess reserves; availability