Unformatted text preview: The Federal Reserve The Federal Reserve System
Central Banking Monetary Policy Payment Systems Regulator Learning Objectives Learning Objectives
1. Understand the 3 functions of the Fed: 2. 3. 4. What is the structure of the Fed? How, and through what mechanisms, does the Fed effect its monetary policy? How does the Fed payment system work and what other financial services are provided by the Fed? Bank and Holding company supervision and regulation, including consumer credit protection Monetary Policy – and stability of financial systems and markets Services to banks and the US Government; Operating Payment Systems and Electronic Networks Some Terms and Concepts Some Terms and Concepts You Should Know Federal Reserve Act (FRA) Federal Reserve System (FRS) FR Board of Governors (FRB) Federal Reserve Banks “Member” Banks Monetary Policy (Goals and Tools of) Federal Open Market Committee Open Market Operations Discount Rate Fed Funds (and FF rate) Reserve Requirements (for deposit accounts distinguish from capital requirements) Time Deposit Accounts Transaction Accounts Check Clearing Operations Bank Holding Company/Financial Holding Company ACH/FedWire The Fed Structure The Fed Structure
From: www.federalreserveeducation.org/fed101 Federal Reserve Structure Federal Reserve Structure Federal Reserve Districts (Banks) Atlanta | Boston | Chicago | Cleveland | Dallas | Kansas City | Minneapolis | New York | Philadelphia | Richmond | San Francisco | St. Louis The Fed Structure The Fed Structure
From: www.federalreserveeducation.org/fed101 Board of Governors 7 governors, appointed by the president and confirmed by the Senate, who serve 14year, staggered terms to ensure stability and continuity over time (chairman and vicechairman have 4year terms and may be reappointed subject to term limitations). Federal Reserve Banks – 12 regional banks (having 25 branches), under the general oversight of the Board of Governors, are the operating arms of the central bank. Each of the 12 Reserve Banks provide services to depository institutions and the public within their region Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The Fed Structure The Fed Structure Member Banks Approximately 38 percent of the 8,039 commercial banks in the United States are members of the Federal Reserve System. National banks must be members; statechartered banks may join if they meet certain requirements. The member banks are stockholders of the Reserve Bank in their District and as such, are required to hold 3 % of their capital as stock in their Reserve Banks (THIS IS DIFFERENT THAN RESERVES) The Fed Structure The Fed Structure Other Depository Institutions / American People In addition to the approximately 3,000 member banks, about 17,000 other depository institutions provide the American people checkable deposits and other banking services. These depository institutions include nonmember commercial banks, savings banks, savings and loan associations, and credit unions. Although not formally part of the Federal Reserve System, these institutions are subject to System regulations, including reserve requirements, and have access to System payments services. The Fed Structure The Fed Structure Federal Open Market Committee FOMC is the Fed's monetary policymaking body. Responsible for formulation of a policy designed to promote stable prices and economic growth. FOMC manages the nation's money supply. The voting members of the FOMC are the Board of Governors, the president of the Federal Reserve Bank of New York and presidents of four other Reserve Banks, who serve on a rotating basis. All Reserve Bank presidents participate in FOMC policy discussions. The chairman of the Board of Governors chairs the FOMC. The Fed Supervision The Fed Supervision Read Chapter 5 of: The Federal Reserve System: Purposes and Functions Bank Holding Companies/Financial Holding Co’s (umbrella regulator for diversified companies) State “Member” Banks Foreign banks and branches in the U.S. Transactions with Affiliates Regulating extensions of credit for securities purchases The Fed – Monetary Policy The Fed – Monetary Policy
From: www.federalreserveeducation.org/fed101 What is monetary policy? The term "monetary policy" refers to what the Federal Reserve, the nation’s central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy. The Fed – Monetary Policy The Fed – Monetary Policy
From: www.federalreserveeducation.org/fed101 What are the goals of monetary policy? The goals of monetary policy include the promotion of sustainable economic growth, full employment, and stable prices. Through monetary policy, the Fed is most able to maintain stable prices, thereby promoting economic growth and maximum employment. The Fed – Monetary Policy The Fed – Monetary Policy
What are the 3 basic tools of monetary policy? 1. Open market operations involves the buying and selling of U.S. government securities (federal agency and MBS). 2.
n The discount rate the interest rate charged by Federal Reserve Banks to depository institutions on shortterm loans. Reserve requirements the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank (12% for transaction accounts and 3% for time deposit accounts).
(compare to “Fed Funds” rate) The term "open market" means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an "open market" in which the various securities dealers that the Fed does business with—the primary dealers—compete on the basis of price. Open market operations are flexible and thus, the most frequently used tool of monetary policy. 3. The Fed – Monetary Policy The Fed – Monetary Policy
Class Exercise Interactive Tool at: http://www.frbsf.org/education/activities/chair man/ A Bank for Banks The Federal Reserve Banks provide financial services to depository institutions including banks, credit unions, and savings and loans, much like those that banks provide for their customers. These services include collecting checks, electronically transferring funds, and distributing and receiving cash and coin. The Fed Financial Services and the The Fed Financial Services and the Payment Systems Check Collection: The Federal Reserve System operated a nationwide check clearing system that processes checks, drafts, and similar items. Depository institutions, including banks and credit unions, send checks they receive to Reserve Banks, which process them and route them to the originating depository institution for collection. Billions of checks annually and process of clearing checks goes on 24 hours a day. The Fed Financial Services and the The Fed Financial Services and the Payment Systems Electronic Payments Services: 2 types of electronic payment services; 1. ACH: The Automated Clearinghouse (ACH) is an electronic payment network most often used to process lowdollar recurring retail payments. The Fed Financial Services and the The Fed Financial Services and the Payment Systems payroll deposits, corporate payments to vendors, Social Security payments, insurance premium payments and utility payments. ACH was first introduced in the 1970's nationally as an efficient way to make payments. ACH is rapidly growing as an alternative to paper checks and handles billions of payments annually. The Fed Financial Services and the The Fed Financial Services and the Payment Systems
1. Fedwire: The Fedwire funds transfer system is a largedollar electronic payment system owned and operated by the Federal Reserve Banks that transfers funds between financial institutions on behalf of their customers. Similar to the ACH, except depository institutions typically transfer large dollar payments, such as a down payment for a home purchase through Fedwire, and use the ACH for smalldollar payments. The majority of Fedwire transactions are initiated on line and all transactions are completed in seconds. A Bank for the Government The Federal Reserve acts as a fiscal agent to the federal government Provides banking/financial services to the US Treasury, including the following: Maintains accounts for U.S. Treasury Processes government checks, postal money orders, and U.S. savings bonds Collects federal tax deposits Sells and redeems government securities (Savings Bonds and Tbills) The Fed Financial Services and the The Fed Financial Services and the Payment Systems Cash (liquidity for the nation) It's up to the Fed to make sure there is always enough money in circulation. Reserve Bank offices maintain cash and coin processing operations to accept deposits and distribute cash and coin to financial institutions. (FR notes that are suspected of being counterfeit are forwarded to the Secret Service; notes that are too worn for recirculation are destroyed and their face value is deducted from the total amount of Federal Reserve notes outstanding.) The Fed Financial Services and the The Fed Financial Services and the Payment Systems Case Study Case Study Life of a check: http://www.federalreserveeducation.org/fed101/services/checklife/check_sim.htm Class Exercise Class Exercise Fed Clue http://www.federalreserveeducation.org/fed101/fedclue/starthunt.cfm ...
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