Principles of Macroeconomics Winter 2010-11 Day 4

Principles of Principles of MacroeconomicsMacroeconomics

Winter 2010-11Winter 2010-11DayDay 4 4

Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes““A Macroeconomic Understanding for use in A Macroeconomic Understanding for use in

Business”Business”

卜安吉卜安吉

December 9, 2010December 9, 2010 Financial Institutions & Mkts, Day 4Financial Institutions & Mkts, Day 4 22

MoneyMoney


The FedThe Fed

What are the three components of the Fed What are the three components of the Fed organization?organization?

– The Governors The Governors – The Federal Reserve BanksThe Federal Reserve Banks– The Federal Open Market CommitteeThe Federal Open Market Committee

“The Fed” is the Central Bank (CB) of the U.S.A.


Three Tools of the Fed (CB)Three Tools of the Fed (CB)1. Open Market Operations

2. Discount Rate

3. Reserve Requirement

Bernanke, Chair

Yellen, Vice Chair

WarshDuke

Currently there are 6 Federal Reserve Board Governors:

Tarullo

http://www.federalreserve.gov/aboutthefed/default.htm

Bloom Raskin


1. Open Market Operations1. Open Market Operations Federal Open Market Committee (FOMC)Federal Open Market Committee (FOMC)

– The 7 Board of Governors The 7 Board of Governors (usually)(usually)

– New York Fed Bank PresidentNew York Fed Bank President– 4 other Presidents of the 11 other Fed 4 other Presidents of the 11 other Fed

BanksBanks

Buy and Sell U.S. Treasury BillsBuy and Sell U.S. Treasury Bills (Notes and (Notes and

Bonds too but mostly Bills)Bonds too but mostly Bills) – Their actions decrease/increase the interest Their actions decrease/increase the interest

rate (respectively). – rate (respectively). – called open market called open market operationsoperations


2. Required Reserve Ratio2. Required Reserve Ratio

Set by the GovernorsSet by the Governors – – the Reserve Ratio is the percentage of the Reserve Ratio is the percentage of

checkable deposits that must be checkable deposits that must be kept at the Federal Reserve District kept at the Federal Reserve District Bank in their District as cash.Bank in their District as cash.

The effect is that the cash is not The effect is that the cash is not available for banks to loan out.available for banks to loan out.


3. Discount Window3. Discount Window

The Discount Window is not a The Discount Window is not a physical place but means that physical place but means that commercial banks may borrow commercial banks may borrow from the Fed at the Discount from the Fed at the Discount Rate.Rate.


3. Discount Window3. Discount Window

The “lender of last resort” function. The “lender of last resort” function. The legislation in 1913 created the The legislation in 1913 created the

Fed in 1914, not in the constitution. Fed in 1914, not in the constitution. Lending to banks was the central Lending to banks was the central

bank’s only role.bank’s only role.


The Federal Reserve The Federal Reserve SystemSystem The Board of GovernorsThe Board of Governors The Fed BanksThe Fed Banks The Federal Open The Federal Open

Market Committee Market Committee (FOMC)(FOMC)


The FedThe Fed: The Board of : The Board of GovernorsGovernors


The Fed:The Fed: The Fed Banks The Fed BanksThe Twelve Federal Reserve Districts – The Fed Banks


The Fed:The Fed: The FOMC The FOMC The FOMC:

The Seven Governors, New York Fed President and 4 other Fed Presidents – 12 total members

Set Monetary Policy for the United States

In other words, the FOMC sets the “Federal Funds Rate” – The interest rate that banks borrow funds from each other

The “Fed Funds” rate determines the “Prime” rate or the interest rate that banks charge their “best” corporate customers

An Increase in the fed funds rate means borrowing is more “expensive.”

A decrease?


The Fed:The Fed: The FOMC The FOMC 2010 Members of the FOMC 2010 Members of the FOMC Members Members

– Ben S. BernankeBen S. Bernanke, Board of Governors, Chairman, Board of Governors, Chairman– William C. DudleyWilliam C. Dudley, New York, Vice Chairman, New York, Vice Chairman– James BullardJames Bullard, St. Louis, St. Louis– Elizabeth A. DukeElizabeth A. Duke, Board of Governors, Board of Governors– Thomas M. Thomas M. HoenigHoenig, Kansas City, Kansas City– Sandra Sandra PianaltoPianalto, Cleveland, Cleveland– Sarah Bloom Sarah Bloom RaskinRaskin, Board of Governors, Board of Governors– Eric S. Eric S. RosengrenRosengren, Boston, Boston– Daniel K. Daniel K. TarulloTarullo, Board of Governors, Board of Governors– Kevin M. Kevin M. WarshWarsh, Board of Governors, Board of Governors– Janet L. Janet L. YellenYellen, Board of Governors , Board of Governors

Alternate Members Alternate Members – Charles L. Evans, ChicagoCharles L. Evans, Chicago– Richard W. Fisher, DallasRichard W. Fisher, Dallas– Narayana Kocherlakota, MinneapolisNarayana Kocherlakota, Minneapolis– Charles I. Plosser, PhiladelphiaCharles I. Plosser, Philadelphia– Christine M. Cumming, First Vice President, New York Christine M. Cumming, First Vice President, New York

Next Meeting: Dec. 14, 2010 still

0 - 0.25% ff rate?

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm


The Fed:The Fed: The Chairman The Chairman

Ben Bernanke

Where is it today?

Principles of Macroeconomics Winter 2010-11 Day 4

Documents

fed presidents

fed banksbuy

fed organization

otherthe fed funds rate

new york fed president

federal funds

board of governorsthomas

board of governorseric