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The Federal Reserve

Richard Slevinsky4/7/03

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OutlineHistory

Organization & FunctionsPolicies & oncerns

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U.S. Bank HistoryFirst !ank o" #nited States

$st% a"ter irth o" #%S% '(7)(*

Second !ank o" #%S% '$st% (+(,*

harters o" oth not rene-ed y President .ackson '(+3,*

ecentralized anking "ro1 (+3,(+,3(2400 ank institutions2 u to (2,00 notetyes

ne5cient2 su6ect to counter"eiting

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 Move Toward Centralizationivil ar8 9ational urrency :ct '(+,3*

Reserves 1aintained / notes redee1ed at

rincial locations '1ain cites*:llo-ed "or chartering o" national anks

Panic o" ()07;nd and 3rd largest anks in country closed

eositors -ithdre- "unds 'run on anks*

 .P

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 Reform!ankers realized re"or1 needed%ashington not easily convinced

:ldrich=reeland :ct

$st% co11ission to study anking syste1sand adat changes i" alicale%

:ldrich Planontained several ideas o" Federal Reserve

>ack o" central authority

#ni"or1 discount rate

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 Federal Reserve sta!lished reated y Federal Reserve :ct2 ()(3

Puroses8 ?o rovide the country -ith an elasticcurrency

entralize ank reserves

Provide 1ultiregional check / currencyclearing syste12 to re@ect countryAsregions and gro-th

Provide anking "acilities "or the "ederalgovern1ent

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Or"anization of the #Fed$

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 Board of %overnorsSeven 1e1er Federal Reserve !oard

(4year ter1sC One ne- ter1 egins every t-o years

 'on ;/(2 evennu1ered years*

C

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Today&s Mem!ershair1an8 :lan Breensan

=icehair1an8 Roert % Ferguson2 .r%

Other 1e1ers8

$d-ard

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 Federal Reserve Banks(; regional reserve anks

$ach ank -ith o-n )1e1er oard o"

directorsCOne erson "ro1 each ankAs oard selected

"or the Federal :dvisory !oard2 1eeting inashington 4 ti1es a year%

Resonsiilitiesistriution o" currency 'aer and coin*Suervise !anks

et% o" ?reasury "unctions

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 Federal Reserve Bank 'istri(ts

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 FOMC o1osed o" the 71e1er !oard o"Bovernors and Reserve !ank residents

Reserve !ank o" 9G is always a 1e1erOther FR! residents serve oneyearter1s

1le1ents national 1onetary olicy

eter1ines the FedAs oen1arkettransactions

eter1ines holdings o" "oreign currencies

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 )oli(ies ?he Federal Reserve has three 1aintools to eecute its 1onetary olicy

Oen 1arket oerations I the urchaseand sale o" govern1ent securities

Reserve reJuire1ents I the reJuiredcash reserve a Dnancial institution1ust kee at the Fed

 ?he discount rate I rate at -hich theFed lends "unds to anks

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O*en Market O*erations ?he Fed controls ank reserves yuying/selling #%S% ?reasury and "ederal

securitiesontrols 1oney suly$Kects anksA lending caacity2 and rates

!uying "ro1 a ank increases that anksA lendingcaacity  increases 1oney suly

!y selling securities2 the Fed eKectively reacJuires -hat it issued e"ore  reduces 1oneysuly

!ank interest rates can e controlled "or shorteriods o" ti1e in this -ay

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 'is(ount Ratenterest rate charged to anks on loansthey receive "ro1 Federal Reserve !ank

>ending "acility called discount -indo-

3 tyes o" loans

Pri1ary8 loaned to stale institutions

Secondary8 liJuidity needs2 Dnancial di5culties

Seasonal8 Reeating intrayear @uctuations2loaned to agricultural anks2 seasonal resortlenders%

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 'is(ount Rate HistoryDISCOUNT RATE

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

1/1/70 10/17/74 8/2/79 5/17/84 3/2/89 12/16/93 10/1/98 7/17/03

Date

        P

      e      r      c      e

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Other Fed rolesFight in@ation

isciline 1onetary gro-th and credit gro-th

C ?hrough interest rates

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Other Fed rolesheck B9P gro-th

" "alling elo- (L

C $ase reserve constraintsC >o-er interest rates

C ounter rising une1loy1ent

" rising aove LC Strengthen reserve constraints

C Raise interest rates

C

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 Fed , Forei"n Curren(y:i1 I intervene in "oreign currency1arkets -hen conditions not ideal

ntervention through 9G "oreignechange 1arkets%

" dollar "alling I Fed urchases

dollar 'sells other currencies*" dollar rising I Sale o" dollar '"orother currencies*

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Swa* -etwork Recirocal shortter1 credit1anage1ent et-een Fed andother "oreign central anks

Fed can orro- currencies "ro1"oreign country "or intervention

oerationsorks oth -ays