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Federal Reserve System

Federal Reserve System. Americans long resisted a central bank Fear of centralized power Distrust of moneyed interests First U.S. experiments with a central bank terminated in 1811 and in 1836 Without lender of last resort … Nationwide bank panics on a regular basis

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Federal Reserve System

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  1. Federal Reserve System • Americans long resisted a central bank • Fear of centralized power • Distrust of moneyed interests • First U.S. experiments with a central bank terminated in 1811 and in 1836 • Without lender of last resort … • Nationwide bank panics on a regular basis • Panic of 1907  a central bank needed • Federal Reserve Act of 1913 • Elaborate system of checks and balances • Decentralized • District banks: Quasi-public institution owned by private member commercial banks in the district

  2. Functions of Federal Reserve District Banks • Clear checks • Issue new currency/withdraw damaged currency from circulation • Make discount loans to banks in district • Evaluate mergers/expansions of bank activities • Liaison between business community and the Fed • Examine bank holding companies and state-chartered member banks • Collect data on local business conditions • Research Money, Banking and the Financial System

  3. Board of Governors • Seven members headquartered in D.C. • Appointed by president/confirmed by Senate • 14-year non-renewable term • Chairman serves 4-year renewable term • Chairman speaks for Fed/“Runs the Show” • Set reserve requirements • Control the discount rate • Direct open market operations • Approve bank mergers • Regulate bank holding companies/foreign banks in the US

  4. Federal Open Market Committee(FOMC) • Meets eight times a year … more often if needed • Reports on domestic and currency open market operations • “Green book” forecast • “Blue book” forecasts … responses to alternative policies • 12 Voting members: 7 Fed Governors; president of FRBNY; and presidents of 4 other district banks in rotation • BoG Chairman chairs FOMC • Directive to the trading desk at FRBNY announced at end of meeting

  5. How Independent is the Fed? • Instrument independent • Goal independent … undemocratic? • Political pressure would impart inflationary bias to monetary policy • Political business cycle? • Could facilitate Treasury financing of large budget deficits—accommodation • Independent revenue • Structured by Congress/accountable to Congress • Presidential influence • Influence on Congress • Appoints members • Appoints chairman

  6. European Central Bank • Patterned after the Federal Reserve • Central banks from each country play similar role as Fed district banks • Monetary operations are not centralized • ECB does not supervise and regulate financial institutions • More independent than Fed • Maastricht Treaty would have to be revised to change ECB charge • But less goal independent than Fed • Price Stability Rules

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