Chapter 5 – Central Banks BA 441 – Financial Markets and Institutions

Chapter 5 – Central Banks The Federal Reserve System “Independent Agent” of the Federal Government Seven Member Board of Governors with 14 year appointments (one expires every two years) Board of Governors Appointed by the President and Approved by Congress Keeper of the Money – Maker of the Money 12 Districts each with a Federal Bank The Banker’s Bank

Chapter 5 – Central Banks Money Supply M1 – Currency and Demand Deposits M2 – M1 + Time Deposits (Savings Accounts) and Money Market Accounts M3 – M2 + Long-term Time Deposits (CDs), Commercial Paper, Banker’s Acceptances and some Treasury Securities Velocity of Money (in circulation) Economy’s Income / Money Supply It is the average amount of transactions carried by a single dollar

Chapter 5 – Central Banks Monetary Policy Instruments of the Federal Reserve Reserve Requirement Required $$ that must be kept at local bank or the Fed based on the demand deposits at a bank Fed can vary percentage (8%-14% for checking accounts, up to 18% under special conditions) Current level (since 1992) is 10% for banks with more than $46.8 million in demand deposits. How does this impact economic activity?

Chapter 5 – Central Banks Monetary Policy Instruments of the Federal Reserve Open Market Operations Buying and Selling of debt instruments for its own account Federal Open Market Committee – Board of Governors and 12 Bank Presidents Conducted by Trading Desk at New York Fed Impact of Buying Impact of Selling

Chapter 5 – Central Banks Monetary Policy Instruments of the Federal Reserve Discount Rate Probably the most watched interest rate Applies to lending and borrowing excess reserves at the Fed Banks short of reserve borrow from banks with excess How do changes impact the economy? Combine with Open Market Operations

Chapter 5 – Central Banks International Central Banks European Central Bank (ECB) operating for 11 countries 17 Member Board with 11 National Central Banks Issues: Weakness of Euro and Reform in the 11 countries Bank of England Sets Interest Rates Bank of Japan Pursues price stability Raised interest rates to 0.25% after years at 0%