1. Chapter 17
Who’s in Charge Here?

2. Key Topics Structure and Purpose of the Federal Reserve System
Controversies and Benefits of Central Bank independence

3. Monetary Policy
Congress created Federal Reserve in 1913 to conduct Monetary policy of U.S.
Important Question of the Chapter
To whom is the Federal Reserve responsible?”
Is it the President who appoints the seven members of the Board of Governors.
Is it the Congress who created it.
Is it the member banks

4. Structure of the FED Feature: Decentralization
Blend of public and private authority
Power is widely diffused
No person, group, or sector can dominate the monetary policy

5. Organization Board of Governors 7 members Selection: Chairman of Board
14 year terms
Appointed by US President
Approved by the Senate
Selection:
No two members from same Federal Reserve district
Any of the 12 Federal Reserve district can contribute only one member
Chairman of Board
Selected by President from Board with 4 year term
Term can not coincide with presidential term

6. Structure and Policy organization

7. Organization Board of Governors Budgetary Independence
Independent of congressional appropriations process
Partly exempt from audit by General Accounting Office (GAO)
Operating funds come from earnings of the 12 regional banks

8. Organization Regional Banks
12 regional Federal Reserve banks dispersed throughout the nation
Each regional banks supervises and regulates the member banks
Technically each regional bank is privately owned by member banks

9. Federal Reserve System

10. Structure Regional Banks 9 Directors President
Member banks elect 6 of 9 directors
Remaining 3 appointed by Board of Governors
President
Nine directors select the president of their regional bank
Approved by the Board of Governors
Federal Advisory Council
Each regional bank selects a representative
Makes recommendations regarding conduct of monetary policy

11. Organization Legal authority of Fed Reserve Requirement
Diffused with respect to the execution of monetary policy
Reserve Requirement
Board of Governors sets the reserve requirements on bank deposits
These rates are subject to limits imposed by Congress

12. Organization Federal Open Market Committee [FOMC]
Directs open market operations
Buying and selling U.S. government securities
Executed by the Federal Reserve Bank of New York

13. Structure Federal Open Market Committee [FOMC] Composed of 12 members
Seven members of Board
Five of regional bank presidents
The president of the New York Fed is a permanent member of the FOMC
Four remaining seats are rotated annually among the remaining eleven regional banks

14. Structure Legal authority of Fed Discount rates
“Established” every 2 weeks by directors of the regional Fed
Subject to “Review and Determination” of Board of Governors
Confusion as to where final authority and responsibility lie

15. The Realities of Power
Chairman of the Board of Governors of Federal Reserve
Dominant figure in formation and execution of monetary policy
Most influential member of the FOMC
Recognized as the voice of the Fed
Chairman is embodiment of US central bank
What is name of this person?

16. Realities of the power within the Federal Reserve System.

17. Evolution of FED Evolution of power of the Fed
The Federal Reserve was first established as a passive service agency
Supplying currency
Clearing checks
Providing discount facility
No idea of monetary policy as an active countercyclical force

18. Evolution of FED Evolution of power of the Fed
Shifting role of central bank
Responsibility for monetary policy has become centralized and concentrated in Washington
Shifted from passive accommodation to active regulation
Rise in power of central bank and decline in role of regional banks
Central bank as headquartered in Washington with 12 field offices

19. Evolution of FED
Power of the Board’s professional staff of economic experts and advisers
Long tenure with the Fed
Familiarity with history of the Fed
Expertise in monetary analysis
Exert significant influence on ultimate decision-making process

20. Evolution of FED Power of the FOMC Role of member banks
Statutory authority is confined to directing open market operations
However, all policy matters are reviewed at FOMC meetings
Role of member banks
They do “own” their regional bank—mostly symbolic
Major voice in electing directors of regional banks who have largely ceremonial responsibilities

21. Problem of Fed’s Independence
Federal Reserve is a creature of the Congress
Constitution of US gives Congress power to “coin money and regulate the value thereof”
The Federal Reserve was created in 1913 to administer this responsibility of Congress

22. Problem of Fed’s Independence
Federal Reserve is a creature of the Congress
Congress requires periodic accountability by Fed
Can amend Federal Reserve Act at any time
Essentially, Congress has given the Fed a broad mandate to regulate monetary system

23. Problem of Fed’s Independence
Congressional concern over status of FED
Concern over
Freedom from congressional appropriations
Exemption from government audit
Questioning of the Fed’s handling of monetary policy—political differences
Complain Fed has not done a good job and perhaps Congress should establish guidelines to limit discretion of Fed

24. Problem of Fed’s Independence
Relationship between Federal Reserve and the President
Should Fed be responsible to the President?
Monetary policy is one component of administration’s total economic program and should be coordinated at highest executive level
Placing Fed under executive control might invite excessive money creation and inflation

25. Problem of Fed’s Independence
Relationship between Federal Reserve and the President
The more independent the central bank—lower inflation
Might sacrifice monetary stability to government’s revenue needs—printing money
The sole purpose of an independent monetary authority is to forestall the natural propensity of governments to resort to inflation

26. Independence and Inflation