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The Federal Reserve
Monetary Policy
Presented by Joseph Stenard
Alexander Hamilton
Alexander HamiltonFirst Secretary of the Treasury
One of the Founding Fathers Spearheaded creation of a central bank First Bank of US est. 1791 Co-Wrote The Federalist Papers promoting a strong central government Difficult childhood – illegitimate son, orphaned at 13, inherited nothing Commanded 3 battalions at the siege of Yorktown Founded Bank of New York Helped to found the United States Mint Killed by Aaron Burr in a duel near the same location his son had been
killed dueling three years earlierQuotes
“A national debt, if it is not excessive, will be to us a national blessing.” “I think the first duty of society is justice.” “A promise must never be broken.”
Central Bank
Oversees and implements Monetary Policy Controls the Money Supply Banker to the banks Loans money to Commercial Banks and
Investment Banks The Fed (Federal Reserve) is our nation’s
Central Bank
Federal Reserve
12 District Banks chartered under the Federal Reserve act of 1913
Spanned the country – representative of population concentration at the time
Signed it into law on December 23, 1913. The Act, "Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in
the United States, and for other purposes.
Federal Reserve Power and Influence
The most powerful man-made entity? Most ubiquitous Highly influential Only 3 tools at its disposal
– Set the Reserve Ratio– Assign the Fed Rate– Conduct Open Market Transactions
The New York Fed Special Functions
At the direction of the Federal Open Market Committee (FOMC), the top monetary policy-making group of the Federal Reserve System, the New York Fed conducts open market operations on behalf of the Federal Reserve System. The president of the New York Bank is a permanent voting member of the FOMC.
The New York Fed and the 11 other Federal Reserve Banks supervise depository institutions by issuing regulations and examining member banks to check their financial soundness.
The 12 Federal Reserve Banks provide depository institutions with various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin.
The New York Fed engages in foreign exchange operations on behalf of the U.S. Treasury Department and the Federal Reserve System, as well as for some foreign central banks and international organizations. As part of its services for foreign and international institutions, the New York Reserve Bank stores monetary gold for dozens of countries.
How Currency Gets into Circulation
There is about $829 billion dollars of U.S. currency in circulation; the majority is held outside the United States.
The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it.
Depository institutions buy currency from Federal Reserve Banks when they need it to meet customer demand, and they deposit cash at the Fed when they have more than they need to meet customer demand.
Denominationof Bill
LifeExpectancy
(Years)
$1 1.8
$5 1.3
$10 1.5
$20 2
$50 4.6
$100 7.4
Is US currency backed by gold?
No The United States stopped selling gold to foreign official
holders of dollars at the rate of $35 an ounce in 1971, it brought the gold exchange standard to an end.
In 1973, the United States officially ended its adherence to the gold standard.
Many other industrialized nations also switched from a system of fixed exchange rates to a system of floating rates.
In August 1974, President Ford repealed the prohibition on the public's owning gold or engaging in gold transactions.
Today, no country bans private ownership of gold.
The Money Supply
The market for money can be described in the terms of supply and demand
Interest rates are the price of money The equilibrium quantity of money is determined
by market forces Monetary policy dictates to the Fed the actions
they take to influence the money supply
Reserve Ratio
Currently at 10% All member banks have a legal reserve
requirement of 10% on all deposits Key to determining the money multiplier If the reserve ratio is increased or decreased,
there will be an inverse effect on the money supply
RR Means MS and vice versa
The Fed Rate
The rate one Federal Reserve bank charges another for an overnight loan
Close to 0% currently Causes all other loans around the world to
be affected Money Supply moves inversely to the
direction of the Fed Rate change FedRate causes MS and vice versa
Open Market Transactions
Secondary market for Treasuries, which are loans to the Government
The Fed will buy treasuries to increase the money supply and sell treasuries to reduce the money supply
The Fed does not issue Treasuries, but is essential to the creation of money
Economic Effects of Monetary Policy
Money Supply Interest Rates Inflation Unemployment
Phillips Law – The government faces a short-run trade-off between inflation and unemployment
Timing is everything
Much of the Fed’s actions are based upon forecasting the anticipated need for the adjustment to the money supply
Reserve Ratio – rarely adjusted, significant long term effects,
Interest Rates – a few times a year, adjustments profound and fully take effect in about a month
Open Market Transactions – daily activity by the Fed immediate and short-run impact
Example Question #1
You are the chair of the Fed Reserve. You are concerned about high unemployment and a protracted recession. Which action would be most effective?
Example Question #2
The Federal Open Market Committee (FOMC) is concerned there might be a little too much exuberance out there today. What would be a good way to “tug on the leash”?
THANK YOU