Structure of the Federal Reserve System

The US Central Bank

The System was created in 1913

Board of Governors runs the system with an appointed Chairman

      The chairman is appointed by the President, approved by the Senate

      This is currently Janet Yellen

      Famous prior Chairmen:  Paul Volcker, Alan Greenspan, Ben Bernanke

12 Fed Banks control Fed actions and currency distribution in their regions:

      A = Boston

      B = New York City

      C = Philadelphia

      D = Cleveland

      E = Richmond

      F = Atlanta

      G = Chicago

      H = St. Louis

      I  = Minneapolis

      J  = Kansas City

      K = Dallas

      L = San Francisco

        

The Federal Open Market Committee (FOMC) or (OMC) is in charge

      of the buying and selling of Fed Bonds…

      BB = BB (The Fed Buys Bonds to create Big Bucks = More Money Supply)    

      SB = SB (The Fed Sells Bonds to create Small Bucks = Less Money Supply)

The Federal Deposit Insurance Corporation (FDIC) has members of most banks in the US and helps manage operations of member banks.  It also insures deposits of the private sector that are place in the banks

The Fed has many “tools” to help run the US banking and money supply systems.

      The main tools are the:

The buying and selling of Bonds

      The Fed Fund Rate Target

      The Discount Rate

      The Reserve Requirement

Interest Rate Basics

Fed Funds Rate

      FDIC member banks loan each other overnight funds in order

      to balance deposit accounts each day.  The interest rate they

      use to loan each other this money is the Fed Fund Rate.

      The Federal Reserve "targets" this rate by suggesting its

      raising or lowering and uses bonds to accomplish the targets.

      The Federal Reserve measures the rate in "basis points".

      100 basis points = 1%.

(LIBOR

      The London Interbank Offered Rate is used worldwide to help

      establish loans between banking institutions.  Being used more in

      newer texts and functions like an international FFR.)

Discount Rate

      FDIC member banks, and other eligible institutions, may borrow

      short term loans directly from the Federal Reserve.  This is

      the "discount window", and is set above the Fed Fund Rate.

      Banks do not like to use the window, since it appears to be

      a move of "last resort" to have to turn to the federal government

      for loan funds.  The FOMC sets the Discount Rate.

Prime Rate

      This is the interest rate banks charge their most "credit

      worthy" borrowers.  Historically, the prime rate, in the US,

      has been set about 3% above the Fed Fund Rate.

                 

Private Rates

      These loan rates are set by supply and demand, the abilities

      of companies to loan out private monies, and subsidized

      federal monies.  Examples would include car companies

      "selling" "zero interest" loans, special student rate loans, etc.

      When companies use these tactics, they hope to regain

      profit with time limits to the special rates, less bargaining on

      the overall product price, heavy late payment fees, etc.

      Any rate below the Fed Fund Rate probably has some kind

of financial trick attached to the contract.

Connections:  Countercyclical Fiscal Policies

Domestic US Market

Always conducted by ____________

Fighting a Recession:	Fighting Inflation:
Policy Name =	Policy Name =
Taxes =	Taxes =
Gov. Spending =	Gov. Spending =
Budget Result =	Budget Result =
Aggregate Model:	Aggregate Model:
C should =	C should =
G should =	G should =
AD should =	AD should =
Money Market:	Money Market:
DM will=	DM will=
i should =	i should=
(Ig on Aggregate Model will)=	(Ig on Aggregate Model will)=
Loanable Funds…Market:	Loanable Funds…Market:
The budget issue will cause:	The budget issue will cause:
S LF =	S LF =
DLF =	DLF =

Connections: Countercyclical Monetary Policies

Domestic US Market

Always conducted by _____________

Fighting a Recession:	Fighting Inflation:
Name =                   or	Name =                 or
Bonds =	Bonds =
FFR Target =	FFR Target =
DR =	DR =
RR =	RR =
Money Market/Loanable Funds:	Money Market/Loanable Funds:
MS should =	MS should =
Bank Loans =	Bank Loans =
i, r should =	i, r should =
Aggregate Model:	Aggregate Model:
Ig should =	Ig should =
AD should =	AD should =

Crowding Out

What is it?	A critique and flaw of ­­­­­­­­­­­­­­­­­­­­­­­__________________ policies that are applied to fight a recession. (An expansionary policy!)
Why does it happen?	The policy of cutting ___ and raising ____ will create a budget deficit.
So?	The budget deficit must be funded and to do this ________ orders the sale of US bonds. (This is NOT a Monetary Policy tool used by the Fed)
This money comes from?	Mostly from US citizens and companies and investment firms.
Therefore?	Money that could be spent on Consumption or used for Private Savings is now being used to _____   ________.
On the Money Market?	This will cause the ___________ curve to shift __________. Remember this is a Fiscal event!
On the Loanable Funds Market?	This will cause the ___________ curve to shift __________ because we are not Saving money privately any more.
Also, on the Loanable Funds ?	This can cause the ___________ curve to shift __________ because the private and public demand for $ ____________.
On both graphs?	The nominal and real _____ rate will ______.
Therefore, on the Investment D graph	The _______ in nominal and real ___________ rates will cause Ig to ____________.
Isn’t this counterproductive?	Yes.
Why do it?	Fiscal Policy supporters (Keynesians) insist that gains in ____ and _____ will outweigh any loss in future ____.
Why?	____ and _____ are greater than _____ and they are Short Run improvements.  _____ is longer run and Keynesians don’t worry about that.  In the long run we are all ______.
Anymore?	Yes, this is summarized on the Aggregate Model.  The AD will move outward due to the increases in ____ and ____ and then “maybe” move inward due to a loss of ____, but not as much as the increase.  Therefore the economy improves.