VIII. The Federal Reserve System

The central bank of the United States is the Federal Reserve System. A central bank is a bank’s bank and a public authority that regulates a nation’s depository institutions and controls the quantity of money. The Fed conducts the nation’s monetary policy, which means that it adjusts the quantity of money in circulation. By adjusting the quantity of money, the Fed can change interest rates.

The Structure of the Fed

• The Board of Governors has seven members, including the chairman (currently Ben Bernanke).
• There are 12 regional Federal Reserve banks.
• The Federal Open Market Committee (FOMC) is the main policy-making group of the Fed. It is comprised of the members of the Board of Governors and the Presidents of the regional Federal Reserve Banks. The Board of Governors, the President of the Federal Reserve Bank of New York, and, on a rotating basis, the presidents of four other regional Federal Reserve Banks, vote on monetary policy. In practice, the chairman has the largest influence on policy.

The Fed’s Balance Sheet

• The Fed’s two main assets are U.S. government securities and loans to depository institutions.

• The Fed’s two main liabilities are Federal Reserve notes (currency) and banks’ deposits.

• The monetary base is the sum of coins, Federal Reserve notes, and depository institution deposits at the Fed. The major parts of the monetary base, Federal Reserve notes and depository institution deposits, are liabilities of the Federal Reserve. Changes in the monetary base lead to changes in the quantity of money.

The Fed’s Policy Tools

• Required Reserve Ratios: The minimum percentage of deposits that depository institutions must hold as reserves are the required reserve ratios. The Fed sets the required reserve ratio. A decrease leads to an increase in the quantity of money and an increase leads to an increase in the quantity of money.
• Last Resort Loans: The Fed is the lender of last resort, which means that if depository institutions are short of reserves, they can borrow from the Fed. The interest rate charged on these loans is the discount rate. In 2008 the Fed changed its policy and encouraged depository institutions to borrow from it. A decrease in the discount rate leads to an increase in the quantity of money and an increase in the discount rate leads to a decrease in the quantity of money.
• Open Market Operation: An open market operation is the purchase or sale of government securities by the Federal Reserve System in the open market. The Fed does not directly purchase bonds from the federal government because it would appear that the government was printing money to finance its expenditures. An open market purchase leads to an increase in the money supply.

Дата добавления: 2015-11-04