The Federal Reserve

Monetary Policy

Presented by Joseph Stenard

Alexander Hamilton

Alexander HamiltonFirst Secretary of the Treasury

One of the Founding Fathers Spearheaded creation of a central bank First Bank of US est. 1791 Co-Wrote The Federalist Papers promoting a strong central government Difficult childhood – illegitimate son, orphaned at 13, inherited nothing Commanded 3 battalions at the siege of Yorktown Founded Bank of New York Helped to found the United States Mint Killed by Aaron Burr in a duel near the same location his son had been

killed dueling three years earlierQuotes

“A national debt, if it is not excessive, will be to us a national blessing.”  “I think the first duty of society is justice.” “A promise must never be broken.”

Central Bank

Oversees and implements Monetary Policy Controls the Money Supply Banker to the banks Loans money to Commercial Banks and

Investment Banks The Fed (Federal Reserve) is our nation’s

Central Bank

Federal Reserve

12 District Banks chartered under the Federal Reserve act of 1913

Spanned the country – representative of population concentration at the time

Signed it into law on December 23, 1913. The Act, "Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in

the United States, and for other purposes. 

Federal Reserve Power and Influence

The most powerful man-made entity? Most ubiquitous Highly influential Only 3 tools at its disposal

– Set the Reserve Ratio– Assign the Fed Rate– Conduct Open Market Transactions

The New York Fed Special Functions

At the direction of the Federal Open Market Committee (FOMC), the top monetary policy-making group of the Federal Reserve System, the New York Fed conducts open market operations on behalf of the Federal Reserve System. The president of the New York Bank is a permanent voting member of the FOMC.

The New York Fed and the 11 other Federal Reserve Banks supervise depository institutions by issuing regulations and examining member banks to check their financial soundness.

The 12 Federal Reserve Banks provide depository institutions with various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin.

The New York Fed engages in foreign exchange operations on behalf of the U.S. Treasury Department and the Federal Reserve System, as well as for some foreign central banks and international organizations. As part of its services for foreign and international institutions, the New York Reserve Bank stores monetary gold for dozens of countries.

How Currency Gets into Circulation

There is about $829 billion dollars of U.S. currency in circulation; the majority is held outside the United States.

The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it.

Depository institutions buy currency from Federal Reserve Banks when they need it to meet customer demand, and they deposit cash at the Fed when they have more than they need to meet customer demand.

Denominationof Bill

LifeExpectancy

(Years)

$1 1.8

$5 1.3

$10 1.5

$20 2

$50 4.6

$100 7.4

Is US currency backed by gold?

No The United States stopped selling gold to foreign official

holders of dollars at the rate of $35 an ounce in 1971, it brought the gold exchange standard to an end.

In 1973, the United States officially ended its adherence to the gold standard.

Many other industrialized nations also switched from a system of fixed exchange rates to a system of floating rates.

In August 1974, President Ford repealed the prohibition on the public's owning gold or engaging in gold transactions.

Today, no country bans private ownership of gold.

The Money Supply

The market for money can be described in the terms of supply and demand

Interest rates are the price of money The equilibrium quantity of money is determined

by market forces Monetary policy dictates to the Fed the actions

they take to influence the money supply

Reserve Ratio

Currently at 10% All member banks have a legal reserve

requirement of 10% on all deposits Key to determining the money multiplier If the reserve ratio is increased or decreased,

there will be an inverse effect on the money supply

RR Means MS and vice versa

The Fed Rate

The rate one Federal Reserve bank charges another for an overnight loan

Close to 0% currently Causes all other loans around the world to

be affected Money Supply moves inversely to the

direction of the Fed Rate change FedRate causes MS and vice versa

Open Market Transactions

Secondary market for Treasuries, which are loans to the Government

The Fed will buy treasuries to increase the money supply and sell treasuries to reduce the money supply

The Fed does not issue Treasuries, but is essential to the creation of money

Economic Effects of Monetary Policy

Money Supply Interest Rates Inflation Unemployment

Phillips Law – The government faces a short-run trade-off between inflation and unemployment

Timing is everything

Much of the Fed’s actions are based upon forecasting the anticipated need for the adjustment to the money supply

Reserve Ratio – rarely adjusted, significant long term effects,

Interest Rates – a few times a year, adjustments profound and fully take effect in about a month

Open Market Transactions – daily activity by the Fed immediate and short-run impact

Example Question #1

You are the chair of the Fed Reserve. You are concerned about high unemployment and a protracted recession. Which action would be most effective?

Example Question #2

The Federal Open Market Committee (FOMC) is concerned there might be a little too much exuberance out there today. What would be a good way to “tug on the leash”?

THANK YOU