The Federal Reserve System

Interactive journey through the Federal Reserve: Fed 101

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Macroeconomic Policy

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The Government and Congress

The Federal Reserve Bank

Changing taxes and spending

Changing credit conditions in the economy.

Fiscal Policy: The Budget Process

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President reviews requests for funding and formulates his budget

February–December 2009

Budget preparation and transmittal to Congress

December 2009 -

February 2010

Congress reviews President’s budget develops its own budget for the president to sign.

March– September 2010

Fiscal Year beginsOctober first 2010

Agency program managers execute the budget.

October 1st 2010 – September 30, 2011

From February 2009 when the decision is made….

To October 2010 when the actual spending takes place!.

Fiscal Policy

Fiscal Policy can not be used for the day to day fine tuning of economic policy

because the budget process is too long.

04/18/23 © 2002 Claudia Garcia-Szekely 4

Congress’ Profile

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SenateHouse

57 Democrats

41 Republicans

2 independent(Vice-president votes in case of a tie)

255 Democrats

178 Republicans

0 Independent

2 vacant

100 Senators16 women

435 Members61 women

Fiscal Policy Decisions

The Good News is…• Democratically elected• More than 500

representatives from different states and political inclinations.

• Fiscal Policy decisions are debated and made open to the public.

The Bad News is…• Democratically elected• More than 500

representatives from different states and political inclinations.

• Fiscal Policy decisions are debated and made open to the public.

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Monetary Policy

Rule by the Few: The Federal Reserve System

Created on December 23, 1913 by an Act of

Congress.04/18/23 © 2002 Claudia Garcia-Szekely 7

Twelve Federal Reserve Districts

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Fed District Banks are corporations whose stock holders are member banks in the district.

Federal Reserve System

Board of Governors (7)

12 Regional

Bank Presidents

Federal Open Market

Committee (FOMC) (7+5)

4 bank presidents and President of the New York Fed

The Board of Governors (7)

Members are appointed by the President and confirmed by the senate to 14 year terms.

• Chairman and Vice-chairman are appointed by the president and confirmed by the senate to 4 year terms.

• The president is directed by law to select “a fair representation of the financial, agricultural, industrial and commercial interests and geographical divisions of the country”

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Board of Governo

rs (7)

12 Region

al Banks

Federal Open

Market Committee

(FOMC) (7+5)

The Federal Open Market Committee: 12 members

• (7)Members of the Board of Governors of the Federal Reserve System– Appointed by president confirmed by senate

• (1)President of the Federal Reserve Bank of New York.

• (4) On a rotating basis: presidents of the eleven other reserve banks.– Appointed by the board of directors of each bank. – Fed District Banks are corporations whose stock holders

are member banks in the district.

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The FOMC (12 members) Conducts Monetary Policy

• Promote economic growth, full employment, stable prices and sustainable international trade.

• Meetings closed to the public.

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Monetary Policy decisions can be made quickly enough to respond to the day to day events as they develop.

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Monetary policy therefore always serves, even if it serves badly, the perceived

needs of the rulers of the state. If it also happens to enhance the prosperity and

progress of the masses of the people, that is a secondary benefit; but its first aim is to

serve the needs of the rulers, not the ruled.

Joseph Peden History Professor

Monetary Policy Decisions are Secret

• Only 12 members of the FOMC.• Since January 10, 2000 the FOMC issues a statement

on its assessment of risks to stability in the foreseeable future.

• Minutes are available after the next regularly scheduled meeting.

• In the 1990s after pressure from Congress, the Fed began releasing transcripts of its interest-rate deliberations after a five year lag.

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were

The Functions of the Fed

• Stabilize the business cycle: Inflation and unemployment

• Maintain a solvent banking system–Supervising and regulating depository

institutions• Serving as the banker for the U.S.

government

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Who oversees the Fed and its monetary policy?

• The Constitution gives Congress the power "to coin money" and "regulate the value thereof."

• Congress essentially delegated that power to the Fed when it created the central bank in 1913

• Current law requires the Fed chairman to report to Congress on monetary policy and the economy at least twice a year, and he testifies far more frequently than that.

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What does the Government Accountability Office audit now at the Fed?

• The Federal Banking Agency Audit Act of 1978 put most of the Fed's operations under GAO purview (bank supervision, consumer regulation, payment systems.)

• Congress gave the GAO authority to audit emergency credit facilities (designed for the rescue of individual institutions such as AIG and Bear Stearns)

• Congressional auditors have been blocked from reviewing the Fed's monetary policy operations, its loans to foreign governments and direct lending to banks since 1978, when a law was passed to shield the central bank from politics.

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What is excluded from GAO oversight?

• The GAO can't review most of the Fed's monetary-policy actions or decisions (transactions made under the direction of the Federal Open Market Committee)

• The GAO also cannot look into the Fed's transactions with foreign governments, foreign central banks and other international financing organizations

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2008

• 29 billion dollars to support the bail-out of investment bank Bear Stearns.

• 200 billion dollar government bail-out of US mortgage lenders Fannie Mae and Freddie Mac

• 85 billion dollar loan to US insurance giant AIG

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700 B Financial Bail Out• US Treasury Secretary Hank Paulson gets unlimited authority to buy

the "troubled assets“ so banks can "resume the flow of credit to American families and businesses“

• The US government appoint agents (Wall Street firms) to manage the purchases.

• The Treasury would have "full discretion over the management of assets" which it could "sell at its discretion or may hold assets to maturity". Any cash received "will be returned to the Treasury's general fund for the benefit of US taxpayers".

• The price of the assets will be determined "by market mechanisms where possible" but no real market exists for many of these complex financial instruments

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Ms ~1,400B

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Bonds, Mortgage

backed securities

Loans to banks

Emergency Loans

More Loans

Central Bank Independence

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The House Financial Services Committee approved (43-26) a measure (sponsored by Texas Republican Ron Paul) that would direct the congressional GAO to expand its audits of the Fed to include decisions about interest rates and lending to individual banks.

Vociferously opposed by the Fed: the provision threatens its ability to make monetary policy without political interference.

Federal Reserve Transparency Act of 2009

• Requires the Government Accountability Office to conduct an audit by the end of 2010 and report findings to congress.

• Overrides a law that shields the Fed's monetary-policy decisions from GAO inquiries.

• The Comptroller General may now audit actions taken to extend credit to a single and specific partnership or corporation.

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What would Federal Reserve Transparency Act of 2009 do?

• The audit would detail who the Fed lends to, how much it lends and what agreements it has with foreign central banks and financing organizations.

• Proponents want the Fed to be audited at least annually.

• GAO audits could publicly reveal reams of information that now remain private, sometimes indefinitely: The Fed doesn't identify banks to whom it lends directly for fear of sparking a run on the bank.

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Argument against“It would be a major loss to the country if the

Fed were incapable of running an independent monetary policy. If you have the GAO, after the fact, offering its opinions on whether a certain monetary policy action is correct or incorrect, the active deliberations that are so critical to building a meaningful consensus at the FOMC will begin to become unhelpfully cautious.”

Former Fed Chairman Alan Greenspan

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Federal Reserve Transparency Act of 2009

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Support OpposeCampaign for LibertyPublic CitizenAmericans for Tax ReformU.S. Public Interest Research Groups

Wells FargoMorgan StanleyJ.P. Morgan Deutsche BankFord Motor CompanyComerica Bank

Status

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Introduced Feb 26, 2009

Referred to Committee

View Committee Assignments

Reported by Committee

...

House Vote ...

Senate Vote ...

Signed by President ...

Richard Nixon on Fed Independence

“While I respect his independence … I hope that independently he will

consider that my views are the ones that should be followed."

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Central Bank Independence

0

1

2

3

4

5

6

7

8

9

0 1 2 3 4 5

Index of Central Bank Independence

Ave

rag

e In

flat

ion

Rat

e 19

55 -

198

8 Spain

New Zealand ItalyUK

AustraliaFrance/Norway/Sweden

Denmark

JapanCanada

NetherlandsBelgium UNITED STATES

SwitzerlandGermany

Less More

Check Clearing

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Your check from Bank A

Deposited at Store’s Bank B

Your check from Bank APaid to

Store

Federal Reserve

Your check from Bank A

Deduct amount from Bank A’s

Account

Add amount to Bank B’s

Account

Deduct amount from your

account at AA

Add amount to Store’s

Account at B

B

Deposit at Fed

Bank for the Government

• Deposits– Tax Revenues.– Borrowed money from the public.

• Withdrawals– Tax refunds– Social Security Payments– Government purchases of goods and services

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Supervisory Function of the Fed

• Ensure compliance with banking laws and sound banking practices.– Ensure that banks have adequate reserves– Oversee bank mergers.– Work closely with the Federal Deposit Insurance

Corporation.

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The FDIC • Created by the Banking Act of 1933 and is governed

by laws enacted by Congress.• Examines financial institutions to ensure they in

compliance with consumer protection rules to minimize risk to their customers.

• Insures deposits up to $100,000 in virtually all U.S. banks and savings associations.

• Arranges a resolution for each failing institution.• Federal regulator of about 6,000 commercial and

savings banks that are not members of the Federal Reserve System.

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Central Bank Independence

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Country

Average Inflation Rate

1955- 1988

Index of Central Bank

IndependenceNew Zealand 7.5 1Spain 8.5 1.5Italy 7.2 1.6United Kingdom 6.8 2Australia 6.7 2France/Norway /Sweden 6 2Denmark 6.7 2.5Japan 5 2.5Canada 4.5 2.5The Netherlands 4 2.5Belgium 4 2United States 4 3.5Switzerland 3 4Germany 2.8 4

The Board of Governors (1)Ben S. Bernanke: Chairman• Took office on August 5,

2002.• He received a B.A. in

economics in 1975 from Harvard University (summa cum laude) and a Ph.D. in economics in 1979 from the Massachusetts Institute of Technology.

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Janet L. Yellen

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Took office as Vice Chair of the Board of Governors on October 4, 2010, for a four-year term ending October 4, 2014.

Simultaneously began a 14-year term as a member of the Board that will expire January 31, 2024.

Prior to her appointment as Vice Chair, Dr. Yellen served as President and Chief Executive Officer of the Twelfth District Federal Reserve Bank, at San Francisco.

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Elizabeth A. Duke

Ms. Duke was Senior Executive Vice President and Chief Operating Officer of Towne Bank, a Virginia-based community bank.  Prior to this, she was an Executive Vice President at Wachovia Bank, and an Executive Vice President at SouthTrust Bank.  Earlier in her career, Ms. Duke was President and Chief Executive Officer of Bank of Tidewater, based in Virginia Beach, Virginia.  Ms. Duke served on the Board of Directors of the American Bankers Association from 1999 to 2006, and served as its Chairman from 2004 to 2005.  She also served on the Board of Directors and as President of the Virginia Bankers Association.   She has also served as a member of the Fannie Mae National Advisory Council

Took office on August 5, 2008, to fill an unexpired term ending January 31, 2012.

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Sarah Bloom Raskin Took office on October 4, 2010, to fill an unexpired term ending January 31, 2016. Ms. Raskin was the Commissioner of Financial Regulation for the State of Maryland. Responsible for regulating all types of financial institutions, including banks, credit unions, mortgage lenders and servicers, and trust companies, among others. The Commissioner's Office played an early role in the state's response to the financial crisis, including reforming the foreclosure process, combating foreclosure rescue and loan modification scams and elevating licensing and lending standards.

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Daniel K. Tarullo

Took office on January 28, 2009, to fill an unexpired term ending January 31, 2022. Prior to his appointment to the Board, Mr. Tarullo was Professor of Law at Georgetown University Law Center. Prior to joining the Georgetown Law faculty, Mr. Tarullo held several senior positions in the Clinton administration.Before joining the Clinton administration, he served as Chief Counsel for Employment Policy on the staff of Senator Edward M. Kennedy, and practiced law in Washington, D.C.  He also worked in the Antitrust Division of the Department of Justice and as Special Assistant to the Undersecretary of Commerce.  From 1981 to 1987, Mr. Tarullo taught at Harvard Law School.He received his A.B. from Georgetown University in 1973 and his M.A. from Duke University in 1974.  In 1977, Mr. Tarullo received his J.D. (summa cum laude) from the University of Michigan Law School

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Took office on February 24, 2006, to fill an unexpired term ending January 31, 2018. Prior to his appointment to the Board, Mr. Warsh served as Special Assistant to the President for Economic Policy and as Executive Secretary of the National Economic Council from 2002 until February 2006. His primary areas of responsibility included domestic finance, banking, securities, and consumer protection. Participated in the President's Working Group on Financial Markets and served as the administration's chief liaison to the independent financial regulatory agencies.From 1995 to 2002, Mr. Warsh was a member of the Mergers & Acquisitions Department of Morgan Stanley & Co., in New York, serving as Vice President and Executive Director. Mr. Warsh structured capital markets transactions and facilitated fixed income and equity financings.He received an A.B. in public policy (honors) from Stanford University in 1992 with an emphasis in economics. Mr. Warsh studied law, economics, and regulatory policy at Harvard Law School, receiving a J.D. (cum laude) in 1995. He also studied market economics and capital markets at Harvard Business School and MIT's Sloan School of Management.

Kevin M. Warsh

Timothy F. Geithner

President of the NY Federal on November 17, 2003.

In that capacity, he served as the vice chairman and a permanent member of the Federal Open Market Committee

President Obama nominated Mr. Geithner to be the 75th Secretary of the Treasury and the U.S. Senate confirmed him to the position on January 26, 2009.

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William C. DudleyNew York Fed

Prior to joining the Bank in 2007, Mr. Dudley was a partner and managing director at Goldman, Sachs & Company and served as the firm's chief U.S. economist for a decade.

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