The Federal Reserve System I The basic structure

The Federal Reserve System I. The basic structure of the Fed. ECO 473 – Money & Banking – Dr. D. Foster

The Federal Reserve Banking System v Purpose: Purpose 1. Develop, supervise & control the nation’s money. 2. Serve as a national check-clearing system. 3. Serve as depository for federal gov’t. funds. v Board of Governors of the FRS ü 7 members, equal standing. . . but, includes ü Secretary of the Treasury and ü Comptroller of the Currency. v Problems: Problems ü Only using discount window, ü Each District Bank sets its own policy.

The Federal Reserve Banking System

The Early Fed, 1913– 1935 v Accommodates the Treasury Dept. during WWI. ü Buys Treasury bonds to finance G spending (aka “monetizing the debt”). ü From 1916 to 1918, this increases MS by 70%. ü Huge risk of inflation. v The Great Depression - Failure of the Fed ü Initially increased liquidity, but pulled back. ü By 1933, 33% of banks fail, MS fallen 33%.

The Fed - version 2. 0, 1935 v Serves as a “lender of last resort. ” v Board of Governors reconstituted: ü All 7 member selected by President/Senate confirms. üCan’t include Treasury Sec. nor Comptroller of Currency. ü Members serve 14 yr. terms on staggered basis. ü Geographic diversity. ü Office of Chairman and Vice Chairman created. ü Has authority over district banks. v Federal Open Market Committee (FOMC) ü 12 members; primary policy-making body.

The Evolution of the Modern Fed v WWII - working “for” the U. S. Treasury v Federal Reserve–Treasury Accord (1951) v “Leaning Against The Wind” – Martin (1953 -1970) v The technocratic Fed – Burns (1970 -1978). . . the “political business cycle” v Coping with inflation – Volcker (1979 -1987) v Keeping the economy stable? – Greenspan (1987 -2006) v Coping with recession – Bernanke (2006 -2014) – Yellen (2014 -? )

The Fed’s Balance Sheet • THE FED’S ASSETS – Treasury securities – U. S. agency securities – Discount window loans – Gold certificates. – Special Drawing Right (SDR) certificates – Foreign currency reserves – Cash items in the process of collection • LIABILITIES AND EQUITY CAPITAL – Federal Reserve notes – Bank reserve deposits – U. S. Treasury deposits – Foreign official deposits – Deferred availability cash items – Equity capital

The Fed’s Balance Sheet – 12/2007 In millions of dollars.

The Fed – 2012 Treasury Securities ……… $1. 8 trillion Holdings of MBS …………. $. 95 trillion Total Assets ………………… $2. 9 trillion

The Fed – 2013 Treasury Securities ……… $2. 4 trillion Holdings of MBS …………. $1. 5 trillion Total Assets ………………… $4. 0 trillion

The Fed – 2014 Treasury Securities ……… $2. 6 trillion Holdings of MBS …………. $1. 8 trillion Total Assets ………………… $4. 5 trillion

2012 The Fed – 2012 FR Notes outstanding …. . $1. 1 trillion Bank reserve deposits …. $1. 5 trillion Total Liabilities ………. …… $2. 9 trillion

The Fed – 2013 FR Notes outstanding …. . $1. 2 trillion Bank reserve deposits …. $2. 2 trillion Total Liabilities ………. …… $4. 0 trillion

The Fed – 2014 FR Notes outstanding …. . $1. 3 trillion Bank reserve deposits …. $2. 4 trillion Total Liabilities ………. …… $4. 5 trillion

Goals of Monetary Policy • Inflation goals: – Low/no inflation with limited year-to-year variability. • Output goals: – High and stable economic (GDP) growth. • Employment goals: – Stable employment growth with low unemployment.

The Federal Reserve System I. The basic structure of the Fed. ECO 473 – Money & Banking – Dr. D. Foster