Presentation on theme: "The Federal Reserve (1913) zOriginal Roles -- Provider of Discount Window -- Lender of Last Resort -- Regulate Member Banks (e.g. Reserve Ratios) zManages."— Presentation transcript:
The Federal Reserve (1913) zOriginal Roles -- Provider of Discount Window -- Lender of Last Resort -- Regulate Member Banks (e.g. Reserve Ratios) zManages Monetary Policy zOther Roles as Well.
Structure of the Federal Reserve
Board of Governors (BOG) z7 members zappointed by the President, with the consent of the Senate zserves 14 year, non-renewable terms zsets policy instruments other than open market operations zdecides permissible activities of banks and bank holding companies
zImportant Chairs of the BOG (Federal Reserve) zPaul Volcker -- 1979-87 zAlan Greenspan -- 1987-2006 zBen Bernanke -- 2006-
The Federal Open Market Committee (FOMC) z12 voting members -- 7 Board of Governors + 5 District Bank Presidents (19 members in all) zmeet 8 times per year (more, if needed) zdesigns monetary policy, by specifying Federal Funds rate target (since 1988) zannounces meeting results – assessment of economy and policy moves – to public immediately after meeting
Federal Reserve District Banks zeach bank exists within 12 districts within the US zholds deposits of Federal Government zcollects economic data and does economic research zissues and discards currency zperforms check clearing services
District Banks -- Administer Monetary Policy zconduct Discount Loans with banks within district zenforce reserve requirements for banks within district zhold reserves of banks within district zNew York bank most important, open market operations done there
Federal Reserve Branch Banks and Member Banks zBranch (District) Banks -- serve as decentralized regulators, primarily for larger Fed districts in geographic size zPrivate Banks -- membership distinction trivialized by DIDMCA
How Independent is The Federal Reserve? zStructure implies considerable independence. zFederal Reserve is financially independent of the Federal Governments budget.
zFederal Reserve is still subject to Congressional legislation. -- Dodd-Frank Act – increased oversight of Federal Reserve activities by the Federal Government. -- The Big Threat: legislation calling for significant changes in Fed structure (including placing it directly under the authority of the President and/or Congress).
zThe President and the Federal Reserve -- President appoints members of the BOG -- BOG typically serve less than 14 year terms -- part of the legislative process, can introduce legislation
zFederal Reserve has vigorous lobby in Congress. -- banks: stability of banking system -- financial markets: low inflation, stability -- international presence
Explaining Federal Reserve Behavior zTheory of Bureaucratic Behavior -- The objective of a bureaucracy is to maximize its own welfare. zApplied to the Federal Reserve -- The Fed seeks to maximize its power and autonomy (at the possible expense of economic welfare).
Evidence: The Fed and The Theory of Bureaucratic Behavior zFed tends to avoid conflict with Congress. zFed rarely admits policy errors. zFed tends to support legislation that increases its authority (DIDMCA, FDICIA) and does not decrease its authority.
Should the Federal Reserve Remain Independent?
Arguments to Remove Independence zCurrent Federal Reserve is not democratic, not accountable. zFed has made policy mistakes. zPotential for uncoordinated fiscal and monetary policies yExample -- expansionary fiscal policy with contractionary monetary policy Interest rates zFed can increase liquidity to almost unlimited amounts by constantly printing money.
Arguments to Maintain Independence zIf part of the Federal Government, the Federal Reserve could be used to purchase all of the Federal deficit and debt (monetizing the debt), highly inflationary. zFederal Reserve is more knowledgeable and focused on the economy than Congress.
The Biggest Argument For Continued Independence zCurrent Federal Reserve can make the tough policy decisions. zThe track record of the US Federal Reserve: strong domestic economy in the Volcker and Greenspan years, agility in handling of financial crisis by Bernanke.