1. The Federal Reserve System
II. Fed Structure & Purpose
ECO 473 – Money & Banking – Dr. D. Foster

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

3. The Fed – 2014
Treasury Securities ……… $2.6 trillion
Holdings of MBS …………. $1.8 trillion
Total Assets ………………… $4.5 trillion

4. The Fed – Q2 2017
Treasury Securities ……… $2.56 trillion
Holdings of MBS ……… $1.8 trillion
Total Assets ….… $4.47 trillion

5. FRS – Total Assets;
Sept. 2017:
$4.46 t.
$2.46 t.
$1.77 t.

6. The Fed – 2014
FR Notes outstanding ….. $1.3 trillion
Bank reserve deposits …. $2.4 trillion
Total Liabilities ……….…… $4.5 trillion

7. The Fed – Q2 2017
FR Notes outstanding ….. $1.49 trillion
Bank deposits …. $2.15 trillion
Total Liabilities ……… $4.47 trillion

8. FRS – Total Liabilities; 2007-2017
Sept. 2017:
$4.46 t.
$2.31 t.
$1.58 t.
$0.41 t.

9. 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.

10. Federal Reserve Policy Tools
Open Market Operations
Buy/sell Treasury bonds to affect bank reserves.
The major form of monetary policy.
What will the Fed do if we run out of Treasury bonds?
Discount Window
Lend to member banks to affect bank reserves.
Purpose is to target the “federal funds rate” – iff
This is the rate that banks charge each other for very short term loans.
Required Reserve Ratio (rrD)
Changing this affects bank excess reserves directly.
Used more to reflect structural changes.
Was used in 1937 and precipitates more Great Depression.
Time to let this go?
New policy? – Pay banks i for ER (!!)

11. Intermediate Targets of Monetary Policy
The key rationale for intermediate targeting:
The limited long-term information about the economy available to policymakers.

12. Monetary Policy: Goals & Targets
Open Market Operations
Discount Window
Required Reserve Ratio (rrD)
Price stability
Low unemployment
Sustainable growth
Interest Rates
Monetary Aggregates

13. Choosing an Intermediate Target Variable
Characteristics:
Frequently observable
Consistency with ultimate goals
Definable and measurable
Controllable
Potential variables:
Monetary aggregates M1, M2, MZM
Interest rates (fed’l funds, prime …)
Others:
Nominal GDP
Credit aggregates
Exchange rates

14. Targeting the Federal Funds Rate of Interest
Sept. 2017
1.15%

15. The Federal Reserve System
II. Fed Structure & Purpose
ECO 473 – Money & Banking – Dr. D. Foster