Fed and Monetary Policy

(1)

The Federal Reserve

System and

(2)

Economic Principles

The Federal Reserve System as a central bank

The discount rate as a tool of monetary policy

(3)

Economic Principles

Money supply versus interest rate targets

(4)

A Glimpse at History

Bank note

•_{A promissory note, issued by a bank,}

pledging to redeem the note for a specific amount of gold or silver. The terms of

(5)

A Glimpse at History

In colonial times, before banks

(6)

A Glimpse at History

The first real U.S. money was the Continental Note.

•_{Since Congress had no taxing authority,} it printed Continental Notes to finance the Revolution.

(7)

A Glimpse at History

State-chartered bank

•_{A commercial bank that receives its}

(8)

(9)

Exhibit 1: Growth of

State Banks: 1784-1860

($ millions)

What are some reasons for the rapid growth of state banks?

(10)

A Glimpse at History

Alexander Hamilton proposed a nationally-chartered central bank that would exercise control over the money supply and extend

(11)

A Glimpse at History

•_{Congress accepted Hamilton’s plan}

and created the First Bank of the United States in 1791.

•_{This central bank dampened the}

(12)

A Glimpse at History

Nationally chartered bank

•_{A commercial bank that receives its} charter from the comptroller of the

(13)

A Glimpse at History

(14)

In 1816 Congress created the

Second Bank of the U.S., which again stabilized state banking

(15)

A Glimpse at History

During the Civil War, Congress passed the National Bank Act,

which created a national banking system and the office of the

comptroller of the currency,

(16)

A Glimpse at History

National banks had to buy

Treasury Bonds equal to

(17)

A Glimpse at History

In 1907 the highly respected

Knickerbocker Trust Company collapsed. This spurred a run on banks, a credit crisis, and a

(18)

The Federal Reserve

System

The Federal Reserve Act of 1913 created the Federal Reserve

System (the “Fed”). The Fed has 12 regional district banks that

(19)

The Federal Reserve

System

Does the president of the U.S. control the Fed?

•_{No. Although the Fed was created by and} responsible to Congress, the Fed pursues an independent monetary policy that at

(20)

(21)

Exhibit 2: The

Geography of the

Federal Reserve

System

•_{In what Federal Reserve Bank}

district do you live?

•_{What is the reserve bank city for}

(22)

EXHIBIT 3 NATIONAL BANKS, STATE BANKS, AND TOTAL DEPOSITS: 2000 ($ BILLIONS)

(23)

Exhibit 3: National Banks,

State Banks, and Total

Deposits: 2000 ($ billions)

Of the following, which had the largest number of banks in 2000?

a. National banks

b. State banks (Fed member)

(24)

Exhibit 3: National Banks,

State Banks, and Total

Deposits: 2000 ($ billions)

Of the following, which had the largest number of banks in 2000?

a. National banks

b. State banks (Fed member)

(25)

(26)

Exhibit 4: Organizational

Structure of the Federal

Reserve System

What is the name of the Fed

organization that exercises general supervision over the Federal

Reserve Banks (12 districts)?

(27)

The Federal Reserve

System

The Fed’s main charge is to

safeguard the proper functioning of our monetary system (money supply, interest rates, and the

(28)

The Federal Reserve

System

Federal Open Market Committee

(29)

(30)

Exhibit 5: Identifying

Letters and District

Banks

If you look at the seal to the left of George Washington’s picture on a $1 bill and see the letter “L”, in what district bank was that $1 bill issued?

(31)

The Federal Reserve

System

Discount rate

(32)

(33)

Exhibit 6: Bank

Transactions Triggered

by Brian’s Purchase

Why does Brian’s check go to the

Atlanta Fed and the Cleveland Fed?

(34)

Controlling the

Money Supply

Reserve requirement

(35)

EXHIBIT 8 RESERVE REQUIREMENTS (SEPTEMBER 2000)

(36)

Controlling the

Money Supply

Federal funds market

•_{The market in which banks lend and}

(37)

Controlling the

Money Supply

1. If a private bank has $5,000 in new reserves and the reserve requirement is 20 percent, then what is the maximum amount of new money supply that can be created from this $5,000?

(38)

(39)

Controlling the

Money Supply

Federal funds rate

(40)

Controlling the

Money Supply

Open market operations

•_{The buying and selling of government} bonds by the Federal Open Market

(41)

Controlling the

Money Supply

2. If the Fed wanted to reduce the money supply, would it purchase or sell government securities?

•_{It would sell government securities.}