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8/10/2019 The federal reseve system
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill /Irwin
Chapter Four The Federal Reserve
System, Monetary Policy,
and Interest Rates
8/10/2019 The federal reseve system
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill /Irwin
Major Duties and Responsibilities
of the Federal Reserve System
• Conducting monetary policy
• Supervising and regulating depository
institutions• Maintaining the stability of the financial
system
• Providing payment and other financial servicesto the U.S. government, the public, FIs and
foreign official institutions
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill /Irwin
Structure of the Federal Reserve
System
• 12 FR Banks plus 10 branches located in
major U.S. cities• A 7-member Board of Governors in
Washington, DC
• The Federal Open Market Committee(FOMC)
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill /Irwin
Functions Performed by the Federal
Reserve Banks
• Assistance in the Conduct of Monetary
Policy
• Supervision and Regulation• Government Services
• New Currency Issue
• Check Clearing• Wire Transfer Services
• Research Services
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill /Irwin
Locations of FR Banks and Branches
• Banks located in Atlanta, Boston, Chicago,
Cleveland, Dallas, Kansas City, Minneapolis, New
York, Philadelphia, Richmond, San Francisco and
St. Louis• Branches located in Baltimore, Birmingham,
Buffalo, Charlotte, Cincinnati, Denver, Detroit, El
Paso, Helena, Houston, Jacksonville, Little Rock,
Los Angeles, Louisville, Memphis, Miami,
Nashville, Oklahoma City, Omaha, Pittsburgh,
Portland Salt Lake City, San Antonio, Seattle
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill /Irwin
Board of Governors
• Headquartered in Washington, DC• Each of 7 members appointed by the president of the
United States and confirmed by the Senate
• Board members serve nonrenewable 14-year terms
• President designates two members to chairman and vice-
chairman for four year terms
• Primary responsibilities are the formulation and conduct
of monetary policy and the supervision and regulation of banks
• Chairman advises President on economic policy and
serves as spokesperson for the FR system
8/10/2019 The federal reseve system
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Federal Open Market Committee
(FOMC)
• The major monetary policy-making body of the FR
System
• Main responsibilities are to formulate policies to
promote full employment, economic growth, pricestability, and a sustainable pattern of international
trade
• Open market operations--the purchase and sale of
U.S. government and federal agency securities
• Sets ranges for growth of monetary aggregates and
directs the FR in foreign exchange markets
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Balance Sheet of the Federal Reserve
(in billions of dollars)
Assets Liabilities and Equity
Gold and foreign exchange $ 27.1 Depository institution reserves $ 21.7
SDR certificates 7.2 Vault cash of commercial banks 41.0Treasury currency 27.4 Deposits due to federal government 6.7
Federal Reserve Float 0.1 Deposits due to rest of the world 1.3
FR loans to domestic banks 0.5 Currency outside banks 503.0
Security repurchase agreements 22.1 Miscellaneous liabilities 8.6
U.S. Treasury securities 489.0 FR Bank stock 7.6
U.S. government securities 0.2Miscellaneous assets 16.3
Total assets $589.9 Total liabilities and equity $589.9
8/10/2019 The federal reseve system
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Objective of Money Policy
• To influence the amount of reserve in the
banking system…
• which affects interest rates and availability of
credit and…
• ultimately affects the levels of employment,
output, prices and inflation
8/10/2019 The federal reseve system
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Monetary Policy Tools
• Open Market Operations
– primary determinate of changes in excess reserves in
the banking system impacting the size of the money
supply and/or interest rates• The Discount Rate
– the rate of interest FR Banks charge on emergency
loans to depository institutions
• Reserve Requirements
– determine the minimum amount of reserve assets that
depository institutions must maintain by law to back
transaction deposits held as liabilities
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Impact of Monetary Policy
on Various Economic Variables
Expansionary
Activities
Contractionary
Activities
Impact onReserves
Credit availability
Money supply
Interest ratesSecurity prices
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Alternate Monetary Policy Foci
Interest
Rate
Quantity of Money
(in billions)
i’
i*
i’’
MS
MD’
MD’’
MD
Interest
Rate
Quantity of Money
(in billions)
i* = 6%
i’’= 5%
MS’ MS
MD’
MD
MD’’