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Copyright 2014 by Diane Scott Docking 1
The Federal Reserve
“The Fed Today” video
2Copyright 2014 by Diane Scott Docking
Learning Objectives Understand the history of the
Federal Reserve System (FRS) Understand the major functions of
the FRS Identify the structure of the FRS
Copyright 2014 by Diane Scott Docking 3
History of Federal Reserve System
First Bank of the United States (1791–1811) Disbanded in 1811 Originally each bank printed its own
money (bank notes) Varied size, amount, looks, etc.
Next slide
Copyright 2014 by Diane Scott Docking 5
History of Federal Reserve System (cont.)
No central bank for 4 years. Second Bank of the United States
(1816–1836) Disbanded in 1836 when President
Andrew Jackson vetoed its renewal.
Copyright 2014 by Diane Scott Docking 6
History of Federal Reserve System (cont.)
No central bank from 1836 – 1913 “Free banking era” 1837 – 1863 National Banks: 1863 - 1913
National Bank Act of 1863 Allowed only selected nationally chartered banks to issue
currency Standardized denomination, size, looks, etc. Collateralized by T-Bonds and silver
“Silver Certificates”
No lender of last resort
Copyright 2014 by Diane Scott Docking 8
History of Federal Reserve System (cont.)
No central bank from 1836 – 1913 No lender of last resort Banking panics became regular events
Panics of 1837, 1893, and 1907 Thousands of banks failed during this time.
Copyright 2014 by Diane Scott Docking 9
Banking Panic of 1907
A swarm gathers on Wall Street during the bank panic in October 1907. 1. Stock market decline of
over 50% led by Augustus Heinz and his company United Copper Company attempting to corner the copper market. Financed by Knickerbocker Trust.
2. Contagion spread and other large banks failed.
3. J.P. Morgan to the rescue.
Copyright 2014 by Diane Scott Docking 10
Federal Reserve System:Third U. S. Central Bank
Third U.S. Central Bank - The Fed (1913 – present)
Created by the Federal Reserve Act of 1913 President Woodrow Wilson passed to allay public
concern over the soundness of the US banking system.
Copyright 2014 by Diane Scott Docking 11
Federal Reserve Act of 1913
Created the Federal Reserve System as the central bank and guarantor of the banking system’s liquidity
The Federal Reserve is responsible for: Providing an “elastic currency” which means the
Fed can adjust the money supply to support a dynamic economy
FRS was lender of last resort to banks with liquidity and capital problems
Copyright 2014 by Diane Scott Docking 12
Federal Reserve Act of 1913
This act established the Federal Reserve System.
Headed by 7 Board of Governors/Directors
12 Federal Reserve Banks Nationally chartered banks required
to join; state chartered optional- Gave FRS power to supervise and
examine banks
Copyright 2014 by Diane Scott Docking 13
Federal Reserve System
Federal Reserve System (1913–) Only 12 federal reserve Banks to issue
Federal Reserve Notes
Copyright 2014 by Diane Scott Docking 14
http://www.federalreserve.gov/
Copyright 2014 by Diane Scott Docking 16
Organization of the Federal Reserve:
The Board of Governors
Board of Governors __ individuals appointed by the U.S. president
and confirmed by the Senate Serve nonrenewable ____-year terms
U.S. president appoints one of the 7 as chair whose ___-year term is renewable
Offices in Washington, D.C. Independence of Federal Reserve
Staggered terms of Governors Budget separate from Congress
Copyright 2014 by Diane Scott Docking 18
Organization of the Federal Reserve:
The Board of Governors
Regulate commercial banks
Supervise and regulate member banks and bank holding companies
Oversight of 12 Fed district banks
Establish consumer finance regulations after Congressional legislation
Establish and effect monetary policy
Direct control over two tools of monetary policy
Set reserve requirements
Approve discount rate set by district banks
Indirect control in a third area
Governors are members of the Federal Open Market Committee
Board of Governors has two main functions:
Copyright 2014 by Diane Scott Docking 19
Organization of the Federal Reserve:
The Federal Reserve District Banks
Federal Reserve District Banks ___ districts District bank size related to economic
wealth of district District banks owned by private member
banks ___ Board of Directors of district banks
Three appointed by Board of Governors Three professional bankers Three business persons in district
21Copyright 2014 by Diane Scott Docking
The FRB of New York Responsible for oversight of some of the largest financial
institutions headquartered in Manhattan and the surrounding area.
Houses the open market desk. All of the Feds open market operations are directed
through this trading desk. Only member of the Bank for International Settlements,
providing close contact with other foreign central bankers.
Chairman of New York Fed is the only permanent member of the FOMC, serving as the vice-chairman of the committee.
Copyright 2014 by Diane Scott Docking 22
Organization of the Federal Reserve:
Advisory Committees & Member Banks
Advisory committees from private sector also are a part of overall structure of the Fed
Member Banks Must meet requirements of the Federal Reserve
Board of Governors to be a member bank Nationally chartered banks must be member banks
Chartered by Office of the Comptroller of the Currency State chartered banks may be member banks
Own Federal Reserve Stock 25% of banks controlling 80% of all deposits are
members Currently 37% of the commercial banks in U.S. are members
Copyright 2014 by Diane Scott Docking 23
Organization of the Federal Reserve:
The Federal Open Market Committee
12 members 7 Board of Governors President of the New
York Fed 4 other district bank
presidents appointed on a rotating basis
Other presidents participate but do not vote on monetary policy matters
Monetary policy goals of:
high employment price stability economic growth
Make monetary policy decisions to achieve goals
Forward decisions to N.Y. Fed open market desk
The FOMC meets about every 6 weeks (approx. 8 times/year):
Borrowing From the Federal Reserve Bank – Discount Loans
A Bank With Immediate Reserve Needs Can Borrow From the Federal Reserve.
There Are _______ Types of Loans for Different Needs, Each With Its Own Interest Rate.
There are no longer restrictions on the ___________ of borrowing at the Federal Reserve.
Copyright 2014 by Diane Scott Docking 25
Copyright 2014 by Diane Scott Docking 26
Borrowing From the Federal Reserve Bank
FRB Discount Window.html1. _________ Credit (neé:Adjustment credit)
Only for a few days Can be used for anything, but usually to provide
immediate aid in meeting reserve requirements. May be used to fund sales of Fed Funds.
Available to generally sound financial institutions “No questions asked” loan Rate = Discount rate
2. ________ Credit Only for a few days Usually to provide immediate aid in meeting reserve
requirements. Cannot be used to fund an expansion of bank’s assets.
Available to banks not eligible for primary credit Bank will have to provide more info to Fed. Rate = Primary rate + 50 bp.
Copyright 2014 by Diane Scott Docking 27
Borrowing From the Federal Reserve Bank
FRB Discount Window.html3. ________ Credit
Designed to assist small banks with seasonal swings in deposits and loans.
Longer maturity Rate = market rate (floating)
4. ________ Credit For longer-term liquidity problems of
problem banks, individuals, partnerships, and corporations.
Expensive
28Copyright 2014 by Diane Scott Docking
Inside the Fed: the books
Several research documents are by the Fed, and have been given official, colorful names:
Green book: national forecasts for the next two years
Blue book: projections of monetary aggregates
Beige book: districts’ “state of the economy”
Copyright 2014 by Diane Scott Docking 29
In Summary: Functions of the Federal Reserve System
Effect Monetary Policy U.S. Central Bank In International
Area Fiscal Agent of U.S. Treasury Facilitate Efficient Payments
System Regulate Banks and Bank Holding
Co. Enforce Consumer Credit Laws
Copyright 2014 by Diane Scott Docking 30
http://www.youtube.com/watch?v=Kj9-kRv0e6s&feature=player_embedded
Video: The Fed – Drawing Board – from the FRB of ClevelandClick on Black Screen on next slide