Why stock would generate bigger return on bonds

Fdic charges premium to customers the banks in

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Unformatted text preview: ny twice a year to Congress Goals of Monetary Policy: two equal goals, dual- mandate Stable prices (relatively low inflation, and no deflation), full employment Current Chairman – Ben Bernanke Replaced Alan Greenspan in 2006 Set up as an “independent” agency which reports to Congress but has appointees designated by the President subject to Senate advice and consent Significant pressure on head of NY fed to have more political accountability Fed regional bank heads historically were not appointed by President (But see Dodd- Frank) Primary function: monetary policy Other functions: regulator of bank holding companies, payment system (check clearing) and FedWire (wire transfers) The Fed’s Toolbox: Open market operations: controls money supply gradual Banks are required to have reserves (bank has certain amount of deposits, it must keep certain amount of that money on hand to give to people asking for withdrawals), keeping reserves costs money. As banks get bigger, costs of those reserves goes up, so banks try to optimize level of reserves (don’t want excess reserves), but if they are a little bit below, they have to borrow reserves from another bank through overnight lending market. JP Morgan will borrow cash from Chase to increase reserves, rate one bank charges other bank is FEDERAL FUNDS RATE, fed doesn’t set it but it can affect it by introducing reserves into the system (T- bills it can buy or sell) OMO’s are buying and selling of treasuries that affects level of cash in the system affecting level of reserves in system. Done by FED working with 21 primary dealers. Discount Window: Fed lends money directly to a bank Problem: Fed asks a lot of questions the bank may or may not want to answer. Reserve requirements: allows markets to be effective (Fed can change how much money banks need to have in reserve, altering amount of money banks can loan out) Fed doesn’t change these often It’s started paying interest on reserves, we pay the banks money for them to keep reserves with us. M...
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