Copyright 2014 by Diane Scott Docking 1 The Federal Reserve “The Fed Today” video.

Copyright 2014 by Diane Scott Docking 1

The Federal Reserve

“The Fed Today” video

http://archive.org/details/gov.frb.pa.today

http://archive.org/details/gov.frb.pa.today

2Copyright 2014 by Diane Scott Docking

Learning Objectives Understand the history of the

Federal Reserve System (FRS) Understand the major functions of

the FRS Identify the structure of the FRS


History of Federal Reserve System

First Bank of the United States (1791–1811) Disbanded in 1811 Originally each bank printed its own

money (bank notes) Varied size, amount, looks, etc.

Next slide


History of Federal Reserve System (cont.)

No central bank for 4 years. Second Bank of the United States

(1816–1836) Disbanded in 1836 when President

Andrew Jackson vetoed its renewal.



No central bank from 1836 – 1913 “Free banking era” 1837 – 1863 National Banks: 1863 - 1913

National Bank Act of 1863 Allowed only selected nationally chartered banks to issue

currency Standardized denomination, size, looks, etc. Collateralized by T-Bonds and silver

“Silver Certificates”

No lender of last resort


Silver Certificate



No central bank from 1836 – 1913 No lender of last resort Banking panics became regular events

Panics of 1837, 1893, and 1907 Thousands of banks failed during this time.


Banking Panic of 1907

A swarm gathers on Wall Street during the bank panic in October 1907. 1. Stock market decline of

over 50% led by Augustus Heinz and his company United Copper Company attempting to corner the copper market. Financed by Knickerbocker Trust.

2. Contagion spread and other large banks failed.

3. J.P. Morgan to the rescue.

http://en.wikipedia.org/wiki/File:1907_Panic.png


Federal Reserve System:Third U. S. Central Bank

Third U.S. Central Bank - The Fed (1913 – present)

Created by the Federal Reserve Act of 1913 President Woodrow Wilson passed to allay public

concern over the soundness of the US banking system.


Federal Reserve Act of 1913

Created the Federal Reserve System as the central bank and guarantor of the banking system’s liquidity

The Federal Reserve is responsible for: Providing an “elastic currency” which means the

Fed can adjust the money supply to support a dynamic economy

FRS was lender of last resort to banks with liquidity and capital problems


Federal Reserve Act of 1913

This act established the Federal Reserve System.

Headed by 7 Board of Governors/Directors

12 Federal Reserve Banks Nationally chartered banks required

to join; state chartered optional- Gave FRS power to supervise and

examine banks


Federal Reserve System

Federal Reserve System (1913–) Only 12 federal reserve Banks to issue

Federal Reserve Notes


http://www.federalreserve.gov/



15

Formal Structure of the Fed

Copyright 2014 by Diane Scott Docking


Organization of the Federal Reserve:

The Board of Governors

Board of Governors __ individuals appointed by the U.S. president

and confirmed by the Senate Serve nonrenewable ____-year terms

U.S. president appoints one of the 7 as chair whose ___-year term is renewable

Offices in Washington, D.C. Independence of Federal Reserve

Staggered terms of Governors Budget separate from Congress


Who is this?



The Board of Governors

Regulate commercial banks

Supervise and regulate member banks and bank holding companies

Oversight of 12 Fed district banks

Establish consumer finance regulations after Congressional legislation

Establish and effect monetary policy

Direct control over two tools of monetary policy

Set reserve requirements

Approve discount rate set by district banks

Indirect control in a third area

Governors are members of the Federal Open Market Committee

Board of Governors has two main functions:



The Federal Reserve District Banks

Federal Reserve District Banks ___ districts District bank size related to economic

wealth of district District banks owned by private member

banks ___ Board of Directors of district banks

Three appointed by Board of Governors Three professional bankers Three business persons in district


The FRB of New York Responsible for oversight of some of the largest financial

institutions headquartered in Manhattan and the surrounding area.

Houses the open market desk. All of the Feds open market operations are directed

through this trading desk. Only member of the Bank for International Settlements,

providing close contact with other foreign central bankers.

Chairman of New York Fed is the only permanent member of the FOMC, serving as the vice-chairman of the committee.



Advisory Committees & Member Banks

Advisory committees from private sector also are a part of overall structure of the Fed

Member Banks Must meet requirements of the Federal Reserve

Board of Governors to be a member bank Nationally chartered banks must be member banks

Chartered by Office of the Comptroller of the Currency State chartered banks may be member banks

Own Federal Reserve Stock 25% of banks controlling 80% of all deposits are

members Currently 37% of the commercial banks in U.S. are members



The Federal Open Market Committee

12 members 7 Board of Governors President of the New

York Fed 4 other district bank

presidents appointed on a rotating basis

Other presidents participate but do not vote on monetary policy matters

Monetary policy goals of:

high employment price stability economic growth

Make monetary policy decisions to achieve goals

Forward decisions to N.Y. Fed open market desk

The FOMC meets about every 6 weeks (approx. 8 times/year):

Changing the Discount Rate


Borrowing From the Federal Reserve Bank – Discount Loans

A Bank With Immediate Reserve Needs Can Borrow From the Federal Reserve.

There Are _______ Types of Loans for Different Needs, Each With Its Own Interest Rate.

There are no longer restrictions on the ___________ of borrowing at the Federal Reserve.



Borrowing From the Federal Reserve Bank

FRB Discount Window.html1. _________ Credit (neé:Adjustment credit)

Only for a few days Can be used for anything, but usually to provide

immediate aid in meeting reserve requirements. May be used to fund sales of Fed Funds.

Available to generally sound financial institutions “No questions asked” loan Rate = Discount rate

2. ________ Credit Only for a few days Usually to provide immediate aid in meeting reserve

requirements. Cannot be used to fund an expansion of bank’s assets.

Available to banks not eligible for primary credit Bank will have to provide more info to Fed. Rate = Primary rate + 50 bp.

http://www.frbdiscountwindow.org/


Borrowing From the Federal Reserve Bank

FRB Discount Window.html3. ________ Credit

Designed to assist small banks with seasonal swings in deposits and loans.

Longer maturity Rate = market rate (floating)

4. ________ Credit For longer-term liquidity problems of

problem banks, individuals, partnerships, and corporations.

Expensive

http://www.frbdiscountwindow.org/


Inside the Fed: the books

Several research documents are by the Fed, and have been given official, colorful names:

Green book: national forecasts for the next two years

Blue book: projections of monetary aggregates

Beige book: districts’ “state of the economy”


In Summary: Functions of the Federal Reserve System

Effect Monetary Policy U.S. Central Bank In International

Area Fiscal Agent of U.S. Treasury Facilitate Efficient Payments

System Regulate Banks and Bank Holding

Co. Enforce Consumer Credit Laws


http://www.youtube.com/watch?v=Kj9-kRv0e6s&feature=player_embedded

Video: The Fed – Drawing Board – from the FRB of ClevelandClick on Black Screen on next slide

http://www.youtube.com/watch?v=Kj9-kRv0e6s&feature=player_embedded

Copyright 2014 by Diane Scott Docking 1 The Federal Reserve “The Fed Today” video.

Documents

Transcript of Copyright 2014 by Diane Scott Docking 1 The Federal Reserve “The Fed Today” video.