14- Federal Reserves System

banks that determine, implement, and control a country's monetary policy

central bank of the united states

financial regulation + monetary policy

1. monetary policy - controls supply of money
2. financial regulation - supervise depository institutions
3. price stabilization - keep inflation low or avoid
4. currency stability - keep domestic currency purchasing power stable
5. financial system stability - intervene to avoid fluctuations in financial markets

1. financing the gov
2. supporting commerical banks

1. providing cheap fed credit through discount window (facility that issues loans to FI) with lowest interest rate
2. bailouts
3. subsidies

1. adjustment
2. seasonal
3. extended

a loan of 3-6 days, issued by fed when commercial bank has sudden outflow of deposits
- primary credit, only available to trusted depository institution

a loan of 3-6 weeks issued by the fed to help commercial banks overcome fluctuations of deposits

a loan of 3-12 months (long term) issued by fed when the commercial bank faces major restructuring changes
- secondary credit, available to depository institutions not eligible for primary credit

assets kept by commercial banks to face contingent liability obligations
- expressed as % of deposits
- must be very liquid

8% needed to meet demand deposit obligations and to avoid a bank run

the reserves held by banks in a precise moment

reserves = depositiory institution reserve balances at the fed + vault cash

excess reserves = actual reserves - required reserves

1. assist in conduct of monetary policy
2. supervise anf regulate FRS member banks
3. provide government services
4. issue new currency
5. clear checks
6. provide wire transfers
7. perform banking sector economic research

stable interest rates

- treasury securities
- US government agency securities

- reserve deposits
- currency in circulation

affects the macroeconomy by influencing supply and demand for excess bank reserves
- influences money supply and level of short term and long term interest rates
- affects foreign exchange rates, money and credit in the economy, employment, output and prices

- price stability
- economic growth
- low inflation
- moderate long term interest rates
- full employment
- sustainable pattern of international trade

1) money supply = quantity of reserves
2) interest rates = fed funds rate

fed can only target one of the two
- if they target money supply = it stablizes and interest rates fluctuate
- if they target interest rates = it stabilzes and money supply fluctuates

1. open market operations
2. discount rate
3. changing the level of minimum reserves

- CB buys, + money supply, - interest rate, - required reserve ratio

- CB sells, - money supply, + interest rate, + required reserve ratio

the fed gives credit to commercial banks enabling them to easily lend money
- discount rate = rate federal reserve banks charge on loans
- strong indicator of federal reserves intentions

fed can increase or decreases minimum reserve ratio
- increase required reserve ratio = hold more reserves, lend less money (-credit)
- decrease required reserve ratio = hold less reserves, lend more money (+credit)

change in money supply = (1/new reserve requirement ratio) x change in reserves