Chapter 14. Structure of Central Banks & the Federal Reserve System Origins Structure Independence...
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Chapter 14. Structure of Central Chapter 14. Structure of Central Banks & the Federal Reserve Banks & the Federal Reserve
SystemSystem
Chapter 14. Structure of Central Chapter 14. Structure of Central Banks & the Federal Reserve Banks & the Federal Reserve
SystemSystem
• Origins
• Structure
• Independence
• Origins
• Structure
• Independence
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I. OriginsI. OriginsI. OriginsI. Origins
• “the Fed”
• Federal Reserve Act 1913 response to panic of 1907
• obstacles fear of centralized power
• solution decentralized structure
• “the Fed”
• Federal Reserve Act 1913 response to panic of 1907
• obstacles fear of centralized power
• solution decentralized structure
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II. StructureII. StructureII. StructureII. Structure
• 3 parts: Federal Reserve Banks Board of Governors FOMC
• 3 parts: Federal Reserve Banks Board of Governors FOMC
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1. Federal Reserve Banks1. Federal Reserve Banks1. Federal Reserve Banks1. Federal Reserve Banks
• 12 regional banks
• serve the member banks in that district
-- all national banks
-- option for state banks
-- 33% of commerical banks
• 12 regional banks
• serve the member banks in that district
-- all national banks
-- option for state banks
-- 33% of commerical banks
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• who controls district banks? member banks are part owners
-- 6% dividends
-- part of Board of directors other officers chosen by Board of
Governors
• who controls district banks? member banks are part owners
-- 6% dividends
-- part of Board of directors other officers chosen by Board of
Governors
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• functions clear checks provide/destroy currency research regional economy
-- Beige Book economic education monetary policy approval of mergers, purchases
• FRBNY is most important district banks
• functions clear checks provide/destroy currency research regional economy
-- Beige Book economic education monetary policy approval of mergers, purchases
• FRBNY is most important district banks
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1980 DIDMCA1980 DIDMCA1980 DIDMCA1980 DIDMCA
• all depository institutions keep reserves on deposit at district
bank have access to discount loans
• all depository institutions keep reserves on deposit at district
bank have access to discount loans
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2. Board of Governors2. Board of Governors2. Board of Governors2. Board of Governors
• 7 governors 14-yr. terms (nonrenewable) 1 chair
-- 4-year renewable term
-- Alan Greenspan (1987)
• 7 governors 14-yr. terms (nonrenewable) 1 chair
-- 4-year renewable term
-- Alan Greenspan (1987)
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• Board helps set monetary policy on FOMC sets reserve requirement approves district discount loan
rates
• Board staff economists economic research collect data
• Board helps set monetary policy on FOMC sets reserve requirement approves district discount loan
rates
• Board staff economists economic research collect data
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• Board enforces regulations permissible activities for banks stock margin requirements final say in bank mergers
• Board enforces regulations permissible activities for banks stock margin requirements final say in bank mergers
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3. FOMC3. FOMC3. FOMC3. FOMC
• Federal Open Market Committee
• 12 members 7 governors FRBNY President 4 other district bank presidents
• Federal Open Market Committee
• 12 members 7 governors FRBNY President 4 other district bank presidents
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• meet every 6 weeks assess condition of economy vote on monetary policy
-- announce decision later that day
(since 1996)
• meet every 6 weeks assess condition of economy vote on monetary policy
-- announce decision later that day
(since 1996)
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• FOMC & monetary policy voting on federal funds rate target voting on open market operations
-- buying & selling of Treasury debt by the Fed
• FOMC & monetary policy voting on federal funds rate target voting on open market operations
-- buying & selling of Treasury debt by the Fed
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Fed structure & realityFed structure & realityFed structure & realityFed structure & reality
• appears decentralized
• but power concentrated w/ Board of governors Chair
• appears decentralized
• but power concentrated w/ Board of governors Chair
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III. Fed IndependenceIII. Fed IndependenceIII. Fed IndependenceIII. Fed Independence
• Fed has much more independence in decisions than other federal agencies
• Fed governors do NOT serve “at pleasure of the President”
• Fed decisions not subject to approval of President or Congress
• Fed has much more independence in decisions than other federal agencies
• Fed governors do NOT serve “at pleasure of the President”
• Fed decisions not subject to approval of President or Congress
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sources of independencesources of independencesources of independencesources of independence
• structure Board of governors have long,
nonrenewable terms popularity of chairman w/ financial
sector
• structure Board of governors have long,
nonrenewable terms popularity of chairman w/ financial
sector
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• financing Fed is self-financing
-- Treasury debt
-- discount loans
-- other services Does not depend on Congress for
funding
• financing Fed is self-financing
-- Treasury debt
-- discount loans
-- other services Does not depend on Congress for
funding
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Fed independence is not Fed independence is not complete!complete!Fed independence is not Fed independence is not complete!complete!
• Congress has ultimate power to limit or eliminate Fed
• chairman testifies before Congress every 6 months
• Congress has ultimate power to limit or eliminate Fed
• chairman testifies before Congress every 6 months
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Is independence good?Is independence good?Is independence good?Is independence good?
• common in industrialized countries
• but it is undemocratic• common in industrialized countries
• but it is undemocratic
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ProsProsProsPros
• political goals often conflict with economic goals short term vs. long term goals Congress: re-election Fed: free to pursue unpopular
policies in short-run
-- price stability may require slower economic growth
• political goals often conflict with economic goals short term vs. long term goals Congress: re-election Fed: free to pursue unpopular
policies in short-run
-- price stability may require slower economic growth
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example: 1981-82 recessionexample: 1981-82 recessionexample: 1981-82 recessionexample: 1981-82 recession
• Fed chair Paul Volcker slowed down economy to control inflation “Volcker Recession”: ’81-’82
• results of low inflation: 2 long expansions in 1980s, 1990s
• Fed chair Paul Volcker slowed down economy to control inflation “Volcker Recession”: ’81-’82
• results of low inflation: 2 long expansions in 1980s, 1990s
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ConsConsConsCons
• Fed not accountable for mistakes stuck with bad governors
• independence is no guarantee of success Fed did not prevent bank failures
of Great Depression inflation of 1970s
• Fed not accountable for mistakes stuck with bad governors
• independence is no guarantee of success Fed did not prevent bank failures
of Great Depression inflation of 1970s
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• independent Fed does not coordinate policy with Congress monetary vs. fiscal policy
• independent Fed does not coordinate policy with Congress monetary vs. fiscal policy
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Looking aheadLooking aheadLooking aheadLooking ahead
• money supply process (15 & 16)
• tools used by Fed for to control money supply (17)
• Fed use of monetary policy (18)
• money supply process (15 & 16)
• tools used by Fed for to control money supply (17)
• Fed use of monetary policy (18)