Chapter 5 Outline – The Federal Reserve Overview and Basics

BA3303 (Moore)
Chapter 5 – Part 1 Outline
Fall 2006
Chapter 5 Outline – The Federal Reserve
BA3303 – Moore (Fall 2006)
Overview and Basics
Federal Reserve Bank
 Central Bank of the US
 Monetary Policy (controls money supply)
 Safeguard/Safety Net of Banking System
Role of Federal Reserve
- Through Monetary Policy
 Stable prices
 Control Inflation
 Affect Interest Rates
 Affect Money supply (change reserve requirements)
- Through existence and legal structure
 Supervisory control over member banks
 Depository institution for:
o Member banks (bank reserves)
o US treasury
o Foreign Banks
 Clears intra-bank checks
Federal Reserve Monetary Policy (FOMC)
 Tight Monetary Policy (reduce demand for money)
o Increase Interest Rates
o Reduce Supply of Money
o Tool to fight inflation
o Slows down economy
 Loose Monetary Policy (increase demand for money)
o Lower Interest Rates
o Increase supply of money
o Potentially results in higher inflation
o Stimulates economy
 Policy choices of Current Fed Board driven by data (Bernatke)
BA3303 (Moore)
Chapter 5 – Part 1 Outline
Fall 2006
Structure of Federal Reserve
Board of Governors (7 people, 14 years appointed )
Federal Reserve Districts (12 regions)
- 1 Fed bank per district (e.g. New York, St. Louis, etc.)
Member Banks (national commercial banks)
Federal Open-Market Committee (FOMC)
- Carries out Monetary Policy
Monetary Policy Mechanisms (via FOMC)
- Changing Reserve requirements of member banks, in turn,
changes the supply of money
- When banks lend fund, they create money (90 multiplier) that
trickles through system
Potential Change = (Change in Excess Reserve)/(Reserve Req)
1. Therefore, of $100 deposited, $90 could be lent. Thus, Potential
change is $90/.1 = $900
- Cash withdrawals reduce the monetary supply and potential
- Changing reserve rate is like using chainsaw for brain
- Alternative mechanism is to change discount rate and target
rates. (fine tunes economy)