29th January 2009 By Michelle Sheridan, Lorraine Farrell, Claire Duffy, Sheila Clifford. BOARD OF GOVERNORS 7 members 14 year terms Staggered appointments Chair – B. Bernanke => Spokesperson and Representative Vice – D. Kohn FEDERAL OPEN MARKET COMMITTEE Monetary Policy Making body 12 voting members 5 from the BOG 7 from the Federal Reserve Banks à Rotating on a yearly basis Chair ~ B. Bernanke Vice ~ President of Federal Reserve Bank of New York Federal Reserve Banks Operating arms of the nation’s central banking system 12 banks 9 directors on each boards Classed A, B & C à A represent commercial banks à B & C represent economic interests Member Banks Chartered national banks automatic members 38% meet Fed requirements and are called member banks Must hold 6% of capital and surplus as stock Other Depository Institutions Includes: Non-member commercial banks, credit unions, savings banks and savings and loans associations The federal reserves duties fall into four general areas: Administrating the nations monetary policy Supervising and regulating banking institutions Maintaining the stability of the financial system Providing financial services Board of Governors Primary responsibility – formulation of monetary policy Sit on the FOMC (majority) Sets reserve requirements and shares responsibility with Reserve Bank for discount rate policy Regulatory and supervisory responsibilities Broad responsibilities in the nation’s payments system – implementation of major federal laws Federal Reserve Banks Generate their own income; not operated for profit; return all earnings less FED expenses to U.S Treasury Primary responsibility - influence the flow of money and credit Operate a nationwide payments system distributing currency and serving as banker for the Treasury Each Reserve Bank responsible acts as a depositary in their district Supervisory and regulatory responsibilities Board of Directors The Board of Directors of each Federal Reserve Bank District have regulatory and supervisory responsibilities Each director is responsible for the running of his/her own bank and also reports back to the board of governors. Provide the Federal Reserve System with economic information; information used by FOMC and Board of Governors They initiate changes in the discount rate Monetary Policy. 3 instruments – Open market operations, the discount rate and reserve requirements Foreign currency operations Monetary Policy What are open market operations? Discount Rate Raised Lowered Buys and sells government securities What is the discount rate? Impact on Economic activity Slows Economic Activity Stimulates Economic Activity Policy Check Inflation Economic Growth January ’03, discount rate set 50 basis points above the funds rate target What are reserve requirements? Reserve Requirement Raised Lowered Impact on Bank Lending Reduce lending Increase Lending Reserve ratio used as a tool of monetary policy Foreign Currency Operations Purchases and sales Target unsystematic developments Not A tool of monetary Policy •Why do the Fed change interest rates? •What are the effects of this change? Open market operations are the most important policy tool There are two types: Dynamic open market operations Defensive open market operation How does the Fed conduct open market operations? The FOMC are the decision making authority Advantages of Open Market Operations Occur at the initiative of the Fed Are flexible and precise Are easily reversed Can be implemented quickly
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