Chapter 4 Flashcards
Federal Reserve District Banks
There are 12 Federal Reserve district banks, with the most important being New York.
Commercial banks purchase stock in their Federal Reserve district bank to become members.
Each Fed district bank has nine directors.
Facilitate operations within the banking system (clearing checks, replacing old currency, providing loans).
Member Banks
Commercial banks can elect to become member banks if they meet specific requirements of the Board of Governors.
All national banks are required to be members of the Fed.
Board of Governors
The Federal Reserve Board is made up of seven members.
Each member is appointed by the POTUS and serves a nonrenewable 14-year term.
One of the members is the Federal Reserve Chair for a 4-year renewable term.
One of the members is the Vice Chair for Supervision.
Federal Open Market Committee (FOMC)
Made up of the seven members of the Board of Governors plus the presidents of the five Fed district Banks (NY + 4 of the other 11 on a rotating basis).
Federal Advisory Council
Consists of one member from each Fed Reserve district who represents the banking industry.
Meets with the Board in DC at least 4 times a year.
Community Depository Institution Advisory Council (CDIAC)
Consists of 12 members who represent savings banks, S&Ls, and credit unions.
Meets with the Board twice a year.
Community Advisory Council
Consists of 15 members who offer diverse views on economic circumstances and the financial services needs of consumers and communities.
Meets with the Board twice a year.
Consumer Financial Protection Bureau
Responsible for regulating financial products and services, including online banking, certificates of deposit, and mortgages.
Fed Controls the Money Supply
Fed implements monetary policy with the goals of achieving full employment, low or zero inflation, and moderate long-term interest rates.
The Fed’s monetary policy affects interest rates, it has a strong influence on the cost of borrowing, and thus affects mortgages and other loans.
Monetary policy affects the cost of borrowing by businesses.
It can influence the prices of debt and equity securities.
Decision Process
The FOMC meets 8 times a year, sets targets for the money supply growth level and the interest rate level, and implements monetary policy.
Pre-meeting economic report is a consolidated report of regional economic conditions.
Economic presentations include data and trends for wages, consumer prices, unemployment, GDP, business inventories, foreign exchange rates, interest rates, and financial market conditions.
FOMC decisions allow each member to offer recommendations.
FOMC statement summarizes their conclusion.
Minutes of FOMC meeting are provided to the public.
Fed Purchase of Securities
To lower the federal funds rate, traders purchase Treasury securities from securities dealers.
The dealers’ bank account balances increase, causing an increase in the supply of funds.
Fed Sale of Securities
To increase the federal funds rate, traders sell government securities to government securities dealers.
As the dealers pay for the securities, their bank balances decrease, leading to a decrease in the supply of funds.
Control of M1 vs. M2
The optimal form of money should be controllable by the Fed and have a predictable impact on economic variables when adjusted by the Fed.
M1
Includes currency held by the public and checking deposits at depository institutions.
M2
Includes everything in M1 as well as savings accounts and small time deposits, MMDAs, and some other items.
M3
Includes everything in M1 and M2 in addition to large time deposits and other items.
How Fed Operations Affect All Interest Rates
When the Fed increases the supply of funds, banks have more funds available, placing downward pressure on the federal funds rate.
When the Fed increases the money supply, it places upward pressure on those securities’ market prices.
The Fed’s open market operations reduce not only the federal funds rate, but also the rates on bank deposits, bank loans, T-bills, and other short-term debt securities.
The Fed’s Lending Facilities
It charges a lower interest rate to the most creditworthy depository institutions and a higher rate to depository institutions that are not as creditworthy.
Reserve Requirement Ratio
The proportion of bank deposit accounts that must be held as required reserves or funds held in reserve.
Set by the Fed’s Board of Governors.
Global Monetary Policy
Central banks of other industrialized countries use open market operations and reserve requirement adjustments as monetary policy tools.
The Fed must consider economic conditions in other countries.
European Central Bank (ECB)
Is responsible for setting monetary policy for all European countries that use the euro.
Monetary goals are price and currency stability.
