Federal Reserve Flashcards
Federal Reserve System
The central Bank of the United States. Sometimes called the Federal Reserve Bank or the Fed. Directed by the Federal Reserve Board (FRB)
FRB’s duty
Conduct the nation’s monetary policy to promote maximum employment; Promote a stable price environment, keeping inflation under control
Monetary policy
FRB manages the monetary supply; the amount of cash available within the US economy; monetary policy
Milton Friedman, Ph D
Founder of monetarism (monetarist) theory. Much of the work of the FRB is based on his theories
FRB Measures of the Money supply
Diagnostic tool:
M1: measure of most readily available money to spend: cash and money in demand deposit accounts (DDA)
M2: M1 + “consumer savings deposits” assets that are easily moved to a DDA and spent, including savings accounts, retail (non-negotiable CDs, money market funds, and overnight repurchase agreements.
M3: M2 + “large time deposits” assets that are a bit harder to move into a DDA, such as negotiable (jumbo) CDs and multiday repurchase agreements
FRB active measures
Federal Open Market Operations
Regulation T
The discount rate
The reserve requirement
Federal open-market operations: Loosen money supply
Buys securities from banks. The securities come out of the economy and money goes into the economy through the bank. The increase of reserves (cash) allows banks to make more loans and effectively lowers interest rates. Pumps money into banking system, expanding the money supply and reducing rates
Federal open market operations: Contract/tighten money supply
Sells securities to banks. Cash comes out of banks to pay for securities and the securities go in as each sale is charged against a bank’s reserve (cash) balance. This reduces the bank’s ability to lend money, which tightens credit and effectively raises interest rates. Pulls money out of the system, contracting the money supply and increasing rates.
Regulation T
The current initial deposit is 50% of a the purchase price when using credit to buy a security. In place since 1974
Discount rate
The interest rate the fed charges the bank for a repurchase agreement. The base rate for the nation. Raising the discount rate tends to lift interest rates through the economy; lowering the discount rate tends to cause interest rates to drop
Reserve requirement
The amount a bank must maintain on deposit with the Federal Reserve. Lowering it frees up cash at the banks to fund loan activity, expanding the economy. Raising it decreases the amount available for loans. Changes have a dramatic impact throughout the banking system, so the Fed rarely changes it.
Four prominent interest rates
Federal Funds Rate
Prime Rate
Broker call loan rate
Discount Rate
Federal Funds rate
rate that the commercial money center banks charge each other for overnight loans of $1M or more. A barometer of the direction of short-term interest rates
Prime rate
rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. Each bank sets its own prime rate, with larger banks setting a rate that other banks use or follow. Banks lower their prime rates when the FRB eases the money supply, and raises rates when FRB contracts the money supply
Broker call loan rate/broker loan rate
rate that banks charge BDs on money they borrow to lend to margin account customers. Usually a percentage point or so above other short-term rates. Callable on a 24-hour notice
