The Federal Reserve System
Contents
Introduction
.
General information about Federal Reserve System
1.1 History of formation and
development of FRS
1.2 The organizational
structure of the U.S Federal Reserve
2.
Monetary policy of Federal Reserve System
2.1 Monetary policy
2.2 The implementation of
Monetary Policy
2.3 The Federal Reserve System
in international sphere
Conclusion
List of Literature
Appendixes
Introduction
In his term paper I will discuss the
creation of the Federal Reserve of its functions, which includes the Federal
Reserve System. How to influence interest rates on exchange rates, as banks
around the world depend on the Federal Reserve system. I think it is very
important and interesting topic for me because I am a financier. In this paper
I will try to reveal all the details.U.S. economy and the world economy are
linked in many ways. Economic developments in this country have a major
influence on production, employment, and prices beyond our borders; at the same
time, developments abroad significantly affect our economy. The U.S. dollar,
which is the currency most used in international transactions, constitutes more
than half of other countries’ official foreign exchange reserves. U.S. banks
abroad and foreign banks in the United States are important.Federal Reserve has
supervisory and regulatory authority over a wide range of financial
institutions and activities. It works with other federal and state supervisory
authorities to ensure the safety and soundness of financial institutions,
stability in the financial markets, and fair and equitable treatment of
consumers in their financial transactions. the U.S. central bank, the Federal
Reserve also has extensive and well-established relationships with the central
banks and financial supervisors of other countries, which enables it to
coordinate its actions with those of other countries when managing
international financial crises and supervising institutions with a substantial
international presence
1.
General information about Federal Reserve System
.1 History of formation and
development of FRS
The U.S. Congress as the supreme
legislative body passed the Federal Reserve System (some domestic sources call
it the Federal Reserve Act - approx. Per.), Which marks the beginning of its
work 1913. Interest of the U.S. banking system in the establishment of
country's central bank has increased markedly since the banking crisis of 1907.
At this time, several large financial institutions were close to bankruptcy and
closure due to the fact that banks in this period experienced significant
difficulties in meeting the demand depositors withdraw their funds and turn
them into cash. In addition, small banks in agricultural areas of the country
at this time sought to obtain from its correspondent banks in major cities
heavily in cash. During the banking crisis, savings banks usually require
pre-application for withdrawal of bank deposits, and many banks in both New
York and across the country artificially limited the appeal of deposits in
cash. At that time, several months cash sold above their face value, yielding
additional economic system.1908, Congress passed the so-called law
Oldrncha-Ryland (Aldrich-Vreeland Act), in essence demanded the establishment
of the National Commission treatment, whose functions were attributed to the
development of the project for the central issuing bank of the country.
Appointed a commission consisting of nine senators and nine House members held
several hearings on the issues under examination, and organized an extensive
special investigation being banking in the United States and in foreign
countries. Materials of these studies were so comprehensive, that the final
report of this commission consisted of 23 heavy volumes. In 1913, President
Woodrow Wilson, despite some opposition to the idea of a central institution
issuing bank in the U.S., has entered into financial and economic practices of
U.S. financial institution such as the Federal Reserve System. the beginning,
the main purpose of the Federal Reserve System was to help banks during the
banking crisis and stock market fever. It was further established that in the
period in question there has been no fully satisfactory mechanisms for the
needs of banks in the appropriate level of liquidity. Initially, control over
the quantity of bank credit, money supply and the rate of interest does not
fall within Fed. In this era of economic and financial relations between the
U.S. dominated the gold standard ', and it was assumed that the amount of gold
stored in the bowels of the U.S. banking system is the mechanism that regulates
the amount of money in circulation and bank credit. The founding fathers of the
Fed in his dreams represented the central bank of issue, which would be capable
of providing elastic supply of cash by means of discounting commercial banks.
Original position, lying in the basement of the organization of the Federal
Reserve System, based on a kind of cooperative system in which the U.S. federal
government, the banking system, businessmen, entrepreneurs and ordinary
consumers would cooperate on an equal footing. Initially, the Law on the
Federal Reserve System in 1913 detailed the development of relations between
the twelve Federal Reserve Bank and Federal Reserve Board (renamed in 1935 in
the Board of Governors of the Federal Reserve System) does not provide. From
1914 to 1922, officials from the twelve Federal Reserve banks hold periodic
meetings and consultation meetings, which developed the direction of monetary
policy and make decisions accordingly. In those early years of the Federal
Reserve System, a series of socio-political power in one center at a time when
the foundations of the Federal Reserve System. role and importance of Federal
Reserve Banks. Every single Federal Reserve Bank itself has played an important
role in conducting and realization of a particular monetary policy, despite the
fact that the management of these processes as a whole belongs to the Board of
Governors of the Federal Reserve. Firstly, as members of the Federal Open
Market Committee, five of the twelve presidents of Federal Reserve Banks are
actively involved in developing and determining objectives and tactical
objectives of monetary policy. " Second, the Board of Directors of the
Federal Reserve Banks and produces certain outlines a specific point level of
bank interest rates - one long key parameters of the economic system, which is
submitted for consideration and approval by the Board of addition, Federal
Reserve Bank made an important contribution to the development of concepts of
monetary and credit relations, governing the activities of the Federal Open
Market Committee. Most Reserve Banks publish articles and monthly reports on
current issues of financial and economic life, with a number of these works
received very widespread. Participation by all federal banks in the development
of the main directions of monetary policy provides equal representation on
these issues from different districts, but also provides the Board of Governors
of the Federal Reserve variety of information from places that otherwise would
have been unlikely to see such a centralized body, the Council Governors of the
Federal Reserve. For example, in the late sixties and early seventies, the
Federal Reserve Bank of St. Louis has played an important role by providing the
corresponding impact on the entire Federal Reserve System, and thus contributes
to the transition from a flexible monetary policy to a more rigid. In the late
seventies, the Federal Reserve Bank of Minneapolis has managed its actions to
convince stakeholders to individuals at the Fed to pay more attention to the
importance and influence of the effects of expectations in financial and
economic spheres of a certain monetary policy pursued by the Federal Reserve
System. In 1980 - 1982's economic model of the money market, developed by the
Federal Reserve Bank of San Francisco, has made a significant contribution to
the understanding of the entire Federal Reserve Reserve banks have a decisive
influence on the management of the entire U.S. banking sphere. These functions
include monitoring and inspection activities 1,000 member banks of the Federal
Reserve, 6000, bank holding companies, corporations, whose activities fall
under the jurisdiction of the Law Edge 2, branches and representative offices
of foreign banks in the U.S. In addition, the Federal Reserve Banks provide
loans to banks experiencing financial difficulties. The purpose of such events
(remember the number of loans of commercial banks in New York, Oklahoma and
Seattle) is to provide a stable financial environment and isolation of banks
facing difficulties in order to prevent possible under these circumstances, a
crisis of confidence. last area of responsibility of the Federal Reserve Banks
is to provide a happy financial services. These include the processing of
checks, issuance and receipt of cash, sale and storage of securities the U.S.
federal government, wire transfers of funds. Federal Reserve banks can be
classified as some "semi." Corporations, mainly due to the mechanism
of elections and appointments of directors. Each Federal Reserve Bank is a
corporation having a charter for the right to introduce the operations issued
by public authorities, and, of course, includes the shareholders, board members
and president. Stockholders of the Federal Reserve Bank are member banks of the
Fed's district, but they choose only six of the nine directors of the Federal
Reserve Bank: three directors of the first rank (class A), representing the
usual bankers of creditors, and three directors of the second rank (class B),
representing leading representatives of industrial or agricultural companies,
are actively used in the practice of loan funds. Board of Governors of the
Federal Reserve further appoint three directors of the third rank (class C) in
each Federal Reserve Bank. See Table 1 p. 30to the original plan for the
organization of the Fed thought it necessary to represent in his person the
authorities and the general public. In addition, the Director of the third rank
may not hold in the bank to any other post. Board of Governors of the Federal
Reserve chooses and appoints the chairman and his deputy from among the
directors of the third rank. of profit to any Federal Reserve Bank as a result
of activity also reflects the previously noted by the nature of its structure.
Each bank - member of the Fed - is obliged to purchase from the Federal Reserve
Bank of its district a certain number of shares for an amount of 3% of its own
equity and retained earnings, lawfully this amount on demand can be doubled.
With the increase of share capital and profits of commercial banks, he is
obliged to purchase more shares to maintain a regulated three-percent level.
Dividends paid on these shares, limited to 6%, and more than 90% of the total
income of the Federal Reserve Banks returned to the U.S. Treasury. The main
purpose of the Federal Reserve Banks is not extracting the maximum profit, but
an embodiment of life and economic reality of a certain U.S. monetary policy
and guide multi-faceted economic and financial activities of the Federal
Reserve System. of the twelve Federal Reserve Banks is a weekly financial
report on the results of its activities to the Board of Governors of the
Federal Reserve, which summarizes and processes incoming information, and then
publish at the end of each week. Federal Reserve Banks is located in Washington
and designed to adjust and meet the mutual claims and claims Federal Reserve
Bank, arising from the movement of bank deposits from one Federal Reserve
district to another. to the adopted legislation, all national banks to the U.S.
are required to maintain their membership in the Federal Reserve System, in
addition, a number of banks in the state voluntarily expressed their desire to
join the Fed. Their request was granted. Until 1980, banks belonging to the
Fed, have certain advantages over other banks and savings and loan institutions.
Having the status of a member of the Federal Reserve bank, the financial
authority acquired a certain prestige. Fed member banks are entitled to receive
loans from Federal Reserve Bank of order, as well as to place, these banks
cash, services of the Federal Reserve provided for clearing of checks, we
finally obtain the necessary advice on financial matters of interest. In
addition, the Fed's member banks have the right to use the teletype lines for
the Fed funds transfer. In fairness it should be noted that the services of
clearing checks were not the exclusive privilege of member banks of the Fed as
the bank does not belong to this system, had the right to register with the
Fedof the deregulation of deposit takers and the control of monetary circulation
in 1980 removed most of the differences between the member banks the Federal
Reserve and other banking institutions. In the seventies, more than 500 banks
have stopped his membership in the Federal Reserve System, mainly due to a
sharp rise in market rates of interest in that period. The high level of market
rates of interest was sharply raising the opportunity cost of reserve
requirements of member banks of the Fed. The legislative act of 1980 eliminated
the differences in reserve requirements from different banks and deposit-taking
institutions.
1.2 The organizational
structure of the U.S. Federal Reserve
The Fed has three parts:
See table 2. P 31
- Central Council of
Governors, which is located in Washington, DC
Operations Committee on the
open market.Board of Governors consists of seven members (governors) are
appointed by the President of the United States and approved by the U.S. Senate
for 14 years without the right destination for a second term (the exception is
a situation where the governor has replaced its predecessor and leaves the 14
year period. In this case, if all the governors fully worked out his term, the
U.S. president can nominate only two new candidates (if re-elected president,
he can choose two more candidates for governor). This rule applies to exclude
the chance that the president will appoint to the Board of Governors only his
supporters, which will allow him to exert influence on the Fed. However, in
practice many governors who leaves his job at the Fed before the expiration of
14-year period, and many presidents were nominated for more than two governors.
The term of office of governors always expire on January 31. By law, the
governors should be "financial, agricultural, industrial and commercial
interests, as well as all regions of the country.".S. territory is divided
into four regions, each of which operate with Federal Reserve Banks. In the
first region includes the Boston, Philadelphia and Richmond. The second group
includes Cleveland and Chicago, the third - Atlanta, St. Louis and Dallas, the
fourth - Minneapolis, Kansas City and San Francisco. Each region can be
delegated to the governors of not more than one representative.his appointment
as members of the Board of Governors of the Federal Reserve have the same
freedom of action, as the U.S. Supreme Court. After taking office, they cannot
be dismissed on the grounds that their views do not reflect the views of other
governors or officials. This rule was introduced in order to fully protect the
Fed from external influences and to exclude the impact of political motives in
the governor's decision. The governors work in constant cooperation with the
U.S. administration. They often come out with a report to Congress.
"Face" The Fed is the
Chairman of the Board of Governors, which is responsible for the activities of
the entire system. Chairman of the Board of Governors and Vice-President may
hold office for four years. The U.S. president selects from among the governors,
the nomination must be approved by the Senate. Curiously, many leaders of the
Federal Reserve hold office more than 14 years. Chapter Board of Governors of
the Federal Reserve from time to time meets with U.S. President and the
Minister of Finance. Chairman of the Board of Governors of the Federal Reserve
also has a number of commitments at the international level, in particular, is
an alternative member of the Board of Governors of the United States in the
International Monetary Fund and a member of the U.S.
Federal Reserve Bank
According to the law of the Fed's
entire territory of the United States divided by 12 reserve districts, each of
which is serviced by the Federal Reserve Bank of the district. Federal Reserve
Banks are the main operational arm of the Federal Reserve System, acting as the
central bank for its district. Each of them is a kind of joint-stock company
whose shares are owned by member banks of the district.of Federal Reserve
Banks, along with their 25 branches carry out such functions as the Fed
actuation of a nationwide payments system, the distribution of the national
currency, controlling and regulating member banks and bank holding companies,
as well as the function of the banker for the U.S. Treasury. Each Reserve
District marked its letter and number, so all the U.S. currency will carry a
note with the number and letter of the Reserve Bank, who first released it into
circulation. In addition to performing the functions of the Federal Reserve
system as a whole, such as conducting banking and credit policy, each Reserve
Bank serves as a repository for funds from other banks in his district and
provides loans to banks experiencing financial difficulties.Reserve Bank has a
board consisting of 9 directors from non-employees of the bank. Three directors
who belong to the class A, represent commercial banks that are members of the
Fed. Three directors and three Class B Class C represent the public. Director
of class B and C are elected by commercial banks, members of the Fed. Board of Governors
in Washington appoints Class C directors from among the directors of class C
Board of Governors is elected chairman of the board of directors and his
deputy. Director of class B and C cannot be in a bank or bank holding company
nor officials nor the directors nor employees. Director of P cannot hold shares
in a bank or bank holding company. The Board of Directors in turn appoint a
president and vice president of Reserve Bank, whose choice must be
confirmed by the Governing Council.Reserve Bank
branch has its own board of directors consisting of 5 or 7 people. Most of
those directors appointed by the Reserve Bank of that office, while others are
appointed by the Governing Council.Board of Directors of Reserve Banks and
their branches provide the Federal Reserve full information about the economic
situation in virtually every corner of the country. This information is used by
the Federal Open Market Committee and the Governing Council to make important
decisions about monetary policy. The information gathered Reserve banks are
also available to the public in a special report, which is informally called
the Beige Book (The Beige Book). It is published approximately two weeks before
each meeting of the Federal Open Market Committee. In addition, every two weeks,
the board of each bank should provide the Governing Council about the discount
rate of the bank. And the change it cannot happen without the confirmation of
the Governing Council.reserve banks receive mainly from interest on government
securities that were purchased on the open market. Other important sources of
revenue include interest on the existing system, foreign currency investments,
interest on loans to depository institutions, as well as fees for the provision
of services to depository institutions.paying all the costs the Federal Reserve
Banks send the remains of their income to the treasury. Revenues and
expenditures of the Federal Reserve banks from 1914 to the present day are
included in the Annual Report of the Governing Council. If the Reserve Bank is
liquidated for any reason, all income after payment of bills sent to the
treasury.
The Committee on Open Market
(Federal Open Market Committee - FOMC)Federal
Open Market Committee (FOMC), a component of the Federal Reserve System, is
charged under United States law with overseeing the nation's open market
operations. It is the Federal Reserve committee that makes key decisions about
interest rates and the growth of the United States money supply. It is the
principal organ of United States national monetary policy. (Open market
operations are the buying and selling of United States Treasury securities.)
The Committee sets monetary policy by specifying the short-term objective for
those operations, which is currently a target level for the federal funds rate
(the rate that commercial banks charge between themselves for overnight loans).
The FOMC also directs operations undertaken by the Federal Reserve System in
foreign exchange markets, although any intervention in foreign exchange markets
is coordinated with the US Treasury, which has responsibility for formulating
US policies regarding the exchange value of the dollar.the Fed makes its first
steps in the economic practice of the United States, nobody seriously
considered the open market operations as a sort of instrument control and
economic relations. At this time the Fed to purchase securities of the federal
government primarily in order to get enough of a profitable asset, if the
profits from giving the federal reserve banks loans and advances is, for
whatever reasons, inadequate. Most of the Federal Reserve Banks felt that the
most convenient venue for such transactions is a New York City, and it is here
in the twenties informal committee composed of representatives from all twelve
Federal Reserve Bank, begun to coordinate their actions on securities the
federal government. While almost immediately after its inception, this body
began to affect the state of the economic system, compensating through
appropriate purchase and sale of securities circulation of yellow metal in the
economy and create additional reserves for the system of private banks,
legislative activity, the Federal Open Market Committee (FKOR) has been
executed and legalized only after
the adoption of the Banking Act 1935.Open Market Committee directs open market
operations in securities. At their meetings the members FKOR considering
current economic conditions and determine the most appropriate in their view of
monetary policy and the direction of its development. After this, the Federal
Open Market Committee is preparing a directive order to manage ongoing
operations in the open market, which is also the vice-president of the Federal
Central Bank of New York. This order does not specify its further actions on
the open market itself decides where, how and how much to buy or sell
securities of the federal government. Legislative available only outlines the
proposed direction of monetary policy and sets the values and levels of key
parameters of the banking system, such as the level of free reserves, the sale
rate the Federal Reserve and several other parameters of the monetary and
credit relations. In turn, current operations manager on the open market is
taking the necessary purchases or sales of securities of the federal government
needed to achieve the objectives of the policy before it. [See 5 p. 29]
2010 Members of the FOMC
o Ben S. Bernanke, Board of
Governors, ChairmanWilliam C. Dudley, New York, Vice ChairmanJames Bullard, St.
LouisElizabeth A. Duke, Board of GovernorsThomas M. Hoenig, Kansas CitySandra
Pianalto, ClevelandSarah Bloom Raskin, Board of GovernorsEric S. Rosengren,
BostonDaniel K. Tarullo, Board of GovernorsKevin M. Warsh, Board of
GovernorsJanet L. Yellen, Board of Governors
• Alternate MembersCharles L. Evans,
ChicagoRichard W. Fisher, DallasNarayana Kocherlakota, MinneapolisCharles I.
Plosser, PhiladelphiaChristine M. Cumming, First Vice President, New York [see
16 p.29 ]
2.
Monetary policy of Federal Reserve System
.1 Monetary Policy and the
Economy
main objectives of monetary
authorities in the U.S. .S. monetary policy has two main objectives:
) stimulating production and
employment
) maintaining a "stable"
prices. These goals are listed in the adopted in 1977 amendments to the Federal
Reserve System. the economy develops in a cyclical output and employment levels
are regularly above or below the projected long-term trend. Despite the fact
that monetary policy can not affect the production or employment in the long
run, in the short term it under her power. For example, when the demand for
industrial products is reduced and there comes a recession, the Fed can
stimulate economic growth - of course, time - and help the economy closer to
the long-term levels of production by lowering interest rates. Therefore, in
the short term, the Fed and other central banks are taking measures to
stabilize the economy, resulting in levels of production and employment in
relative conformity with the projected long-term economic growth. question
arises: if the Fed can stimulate the economy out of recession, why it cannot
stimulate the economy all the time? In fact, successive attempts to accelerate
economic growth, placing them beyond the long-term levels, put pressure on the
factors limiting the performance, which will result in more and higher
inflation, not accompanied by long-term decline in the unemployment rate or an
increase in output. In other words, the policy of continuing to support
economic growth not only bring the country long-term benefits, but also to make
people pay for high inflation. pressure has a
negative impact on the economy because, on the one hand, promotes the growth of
interest rates on long-term loans, with another - creates a situation of
uncertainty for businesses and consumers, greatly complicating long-term
planning. In addition, high inflation distorts the meaning of economic
decisions, leading to an arbitrary increase or decrease in the rate of profit
after tax in the various sectors of the economy. , ensuring price stability is
one of the main goals of the Fed. While monetary policy cannot make the economy
grow faster than capacity allows long-term growth, or reduce the level of
unemployment in the long term, but it can stabilize prices across longer time
periods. the Fed can influence the average rate of inflation in the economy,
some experts and some members of Congress, emphasized the need to define the
objectives of monetary policy in the task of maintaining price stability.
However, fluctuations in levels of output and employment is also costing the
public dearly. In practice, the Fed, like any central bank has to control not
only inflation but also about
economic growth in the short term.main objectives pursued by the Fed tend to
contradict each other. One of the contradictions arise when deciding on what
the purpose is of paramount importance at a time. For example, suppose that
during a recession the Fed takes measures to prevent the excessive rise in
unemployment. Short-term success in this area could result in long-term
problems if the monetary policy for too long will be aimed at stimulating
employment, since it would lead to higher inflationary pressures. Therefore, it
is very important for the Fed to find a balance between short-term
stabilization and long-term objective for low inflation. Fed controls the rate
of inflation or influence output and employment levels through changes in the
cost of short-term loans. Impact on the level of interest rates is carried out
mainly through open market operations and the federal funds rate, both these
methods work in the market of bank reserves, also called the federal funds
market. accordance with the law, banks and other depository institutions (for
brevity, they are all in this material are referred to as "Bank") to
create specific funds that can be used to meet unexpected cash outflows. These
funds are in cash held in banks' vaults or as deposits at the Fed. Currently,
banks are obliged to keep from 3% to 10% of funds held in interest-bearing and
interest bearing checking accounts as reserves, depending on the total dollar
amount available on such accounts in each bank. In addition, banks can generate
additional reserves required for settlements as "overnight" and other
payments. in need of additional short-term reserves can borrow them from other
banks, which currently have excess reserves. Such loans are made on the
so-called federal funds market and interest rates on short-term loans is
determined by the federal funds rate, which is the "target".
Manipulation of the rate and change in reserves leads to a corresponding
adjustment of interest rates, money market, which ultimately allows you to
balance the demand for cash and cash offer. Thus, the increase in excess
reserves, supplied to the market federal funds, leading to a drop
in interest rates, and vice versa.can also
borrow reserves from the Federal Reserve Banks use the so-called «Discount
window" and the interest rate, which is set for these loans is called the
discount rate. Total number of funds, the adopted through the "discount
window", as a rule, very small, because the Fed does not encourage such
loans, except in cases where banks borrow to offset the short-term shortage of
reserves. fact, the role of interest rates in the U.S. monetary policy is that
its change could signal a significant change in monetary policy. Raising the
discount rate indicates an restrictive policy, and its decline could mean a
transition to a policy of stimulating economic growth. See table 3 p 31
Open market operations are the main
tool used the Fed to influence the supply of free reserves in the banking
system. This term refers to ongoing Fed buying and selling government
securities on the open market. These operations are conducted by the Federal
Reserve Bank of New York. If the Fed wants to lower interest rates on federal
funds market, it buys from banks in government securities, resulting in the
amount of funds held by banks, is higher than the obligatory amount and the
bank is able to provide the excess reserves as loans to other banks federal
funds market. , the Fed buying securities on the open market increases the
money supply in the banking system, resulting in lower interest rates on
federal funds market. In order to increase bets the Fed sells government
securities, and receives in payment of bank funds, which reduces the amount of
the money supply in the banking system and leads to an increase in interest
rates in the money market. and sales of foreign currency FOMC implemented
jointly with the Ministry of Finance, bearing full responsibility for these
operations. The Fed does not set in this area targets, or desired levels of
exchange rates. Instead, the Fed takes measures to reduce the negative effects
of erratic fluctuations in the currency markets, in particular, fluctuations
caused by speculation and tend to impede the effective functioning of the
currency markets or financial markets generally. For example, in some periods,
characterized by a sharp depreciation of the dollar, the Fed bought the
currency (by selling foreign), to counter the negative pressure. Foreign
exchange intervention with the dollar, regardless of who is the initiator: the
Fed, the Treasury or regulatory authority of a foreign country - should not
change the amount of funds offered by banks in the money market or interest rates.
Targeted prevention of the influence of foreign exchange intervention on bank
reserves and interest rates, carried out by the responsible authorities, cannot
use these transactions as an instrument of monetary policy. aggregate demand
for products made by U.S. companies reach such a variety of ways, leads to the
fact that firms begin to increase production volumes and the number of workers.
This increases their need to expand production capacity and, hence, promotes
the growth of cost of inputs. Rising incomes, resulting from increasing
production, in turn, leads to increased consumption. of changes in monetary
policy are usually long term, and the duration of their impact on the economy
may be different. The main effect provided by these changes, the overall
increase in the production of goods and services, usually manifests itself
during the period it takes from 3 months to 2 years. And the effect of changes
in monetary policy on inflation is significantly during more prolonged periods
of between one to three years and even longer. , it is very difficult any
pinpoint the period during which changes n monetary policy will affect the
economy, because such changes are intended to influence the demand and,
consequently, their influence depends on the reaction of people, which is
volatile and difficult to predict. In particular, the effect is provided by
measures of monetary policy on the economy, depends on the opinions of
Americans about how the actions taken by the Fed, will affect the rate of
inflation in the future.
.2 The Implementation of
Monetary Policy
Federal Reserve exercises
considerable control over the demand for and supply of balances that depository
institutions hold at the Reserve Banks. In so doing, it influences the federal
funds rate and, ultimately, employment, output, and prices. Federal Reserve
implements U.S. monetary policy by affecting conditions in the market for
balances that depository institutions hold at the Federal Reserve Banks. The
operating objectives or targets that it has used to effect desired conditions
in this market have varied over the years. At one time, the FOMC sought to
achieve a specific quantity of balances, but now it sets a target for the
interest rate at which those balances are traded between depository institutions-the
federal funds rate. By conducting open market operations, imposing reserve
requirements, permitting depository institutions to hold contractual clearing
balances, and extending credit through its discount window facility, the
Federal Reserve exercises considerable control over the demand for and supply
of Federal Reserve balances and the federal funds rate. Through its control of
the federal funds rate, the Federal Reserve is able to foster financial and
monetary conditions consistent with its monetary policy objectives. The Federal
Reserve influences the economy through the market for balances that depository
institutions maintain in their accounts at Federal Reserve Banks. Depository
institutions make and receive payments on behalf of their customers or
themselves in these accounts. The end-of-day balances in these accounts are
used to meet reserve and other balance requirements. If a depository
institution anticipates that it will end the day with a larger balance than it
needs, it can reduce that balance in several ways, depending on how long it
expects the surplus to persist. For example, if it expects the surplus to be
temporary, the institution can lend excess balances in financing markets, such
as the market for repurchase agreements or the market for federal funds. most
of the 1970s, the Federal Reserve targeted the price of Federal Reserve
balances. The FOMC would choose a target federal funds rate that it thought
would be consistent with its objective for M1 growth over short intervals of time.
The funds-rate target would be raised or lowered if M1 growth significantly
exceeded or fell short of the desired rate. At times, large rate movements were
needed to bring money growth back in line with the target, but the extent of
the necessary policy adjustment was not always gauged accurately. Moreover,
there appears to have been some reluctance to permit substantial variation in
the funds rate. As a result, the FOMC did not have great success in combating
the increase in inflationary pressures that resulted from oil-price shocks and
excessive money growth over the decade. late 1979, the FOMC recognized that a
change in tactics was necessary. In October, the Federal Reserve began to
target the quantity of reserves-the sum of balances at the Federal Reserve and
cash in the vaults of depository institutions that is used to meet reserve
requirements-to achieve greater control over M1 and bring down inflation. In
particular, the operational objective for open market operations was a specific
level of non-borrowed reserves, or total reserves less the quantity of discount
window borrowing. A predetermined target path for non-borrowed reserves was
based on the FOMC’s objectives for M1. If M1 grew faster than the objective,
required reserves, which were linked to M1 through the required reserve ratios,
would expand more quickly than non-borrowed reserves. With the fixed supply of
non-borrowed reserves falling short of demand, banks would bid up the federal
funds rate, sometimes sharply. The rise in short-term interest rates would
eventually damp M1 growth, and M1 would be brought back toward its targeted
path. demand for Federal Reserve balances has three components: required
reserve balances, contractual clearing balances, and excess reserve balances.
reserve balances are balances that a depository institution must hold with the
Federal Reserve to satisfy its reserve requirement. Reserve requirements are
imposed on all depository institutions-which include commercial banks, savings
banks, savings and loan associations, and credit unions-as well as U.S.
branches and agencies of foreign banks and other domestic banking entities that
engage in international transactions. Since the early 1990s, reserve
requirements have been applied only to transaction deposits, which include
demand deposits and interest-bearing accounts that offer unlimited checking
privileges. An institution’s reserve requirement is a fraction of such
deposits; the fraction-the required reserve ratio-is set by the Board of
Governors within limits prescribed in the Federal Reserve Act. A depository
institution’s reserve requirement expands or contracts with the level of its
transaction deposits and with the required reserve ratio set by the Board. In
practice, the changes in required reserves reflect movements in transaction
deposits because the Federal Reserve adjusts the required reserve ratio only
infrequently. depository institution satisfies its reserve requirement by its
holdings of vault cash (currency in its vault) and, if vault cash is insufficient
to meet the requirement, by the balance maintained directly with a Federal
Reserve Bank or indirectly with a pass-through correspondent bank (which in
turn holds the balances in its account at the Federal Reserve). The difference
between an institution’s reserve requirement and the vault cash used to meet
that requirement is called the required reserve balance. If the balance
maintained by the depository institution does not satisfy its reserve balance
requirement, the deficiency may be subject to a charge. supply of Federal
Reserve balances to depository institutions comes from three sources: the
Federal Reserve’s portfolio of securities and repurchase agreements; loans from
the Federal Reserve through its discount window facility; and certain other items
on the Federal Reserve’s balance sheet known as autonomous factors. theory, the
Federal Reserve could conduct open market operations by purchasing or selling
any type of asset. In practice, however, most assets cannot be traded readily
enough to accommodate open market operations. For open market operations to
work effectively, the Federal Reserve must be able to buy and sell quickly, at
its own convenience, in whatever volume may be needed to keep the federal funds
rate at the target level. These conditions require that the instrument it buys
or sells be traded in a broad, highly active market that can accommodate the
transactions without distortions or disruptions to the market itself. market
for U.S. Treasury securities satisfies these conditions. The .S. Treasury
securities market is the broadest and most active of U.S. financial markets.
Transactions are handled over the counter, not on an organized exchange.
Although most of the trading occurs in New York City, telephone and computer
connections link dealers, brokers, and customers-regardless of their
location-to form a global market. Market Operations Federal Reserve Bank of New
York conducts open market operations for the Federal Reserve, under an
authorization from the Federal Open Market Committee. The group that carries
out the operations is commonly referred to as “the Open Market Trading Desk” or
“the Desk.” The Desk is permitted by the FOMC’s authorization to conduct
business with U.S. securities dealers and with foreign official and international
institutions that maintain accounts at the Federal Reserve Bank of New York.
The dealers with which the Desk transacts business are called primary dealers.
The Federal Reserve requires primary dealers to meet the capital standards of
their primary regulators and satisfy other criteria consistent with being a
meaningful and creditworthy counterparty. All open market operations transacted
with primary dealers are conducted through an auction process. day, the Desk
must decide whether to conduct open market operations, and, if so, the types of
operations to conduct. It examines forecasts of the daily supply of Federal
Reserve balances from autonomous factors and discount window lending. The
forecasts, which extend several weeks into the future, assume that the Federal
Reserve abstains from open market operations. These forecasts are compared with
projections of the demand for balances to determine the need for open market
operations. The decision about the types of operations to conduct depends on
how long a deficiency or surplus of Federal Reserve balances is expected to
last. If staff projections indicate that the demand for balances is likely to
exceed the supply of balances by a large amount for a number of weeks or
months, the Federal Reserve may make outright purchases of securities or
arrange longer-term repurchase agreements to increase supply. Conversely, if
the projections suggest that demand is likely to fall short of supply, then the
Federal Reserve may sell securities outright or redeem maturing securities to
shrink the supply of balances. after accounting for planned outright operations
or long-term repurchase agreements, there may still be a short-term need to
alter Federal Reserve balances. In these circumstances, the Desk assesses
whether the federal funds rate is likely to remain near the FOMC’s target rate
in light of the estimated imbalance between supply and demand. If the funds
rate is likely to move away from the target rate, then the Desk will arrange
short-term repurchase agreements, which add balances, or reverse repurchase
agreements, which drain balances, to better align the supply of and demand for
balances. If the funds rate is likely to remain close to the target, then the
Desk will not arrange a short-term operation. Short-term temporary operations
are much more common than outright transactions because daily fluctuations in
autonomous factors or the demand for excess reserve balances can create a
sizable imbalance between the supply of and demand for balances that might
cause the federal funds rate to move significantly away from the FOMC’s target.
requirements have long been a part of America’s banking history. Depository
institutions maintain a fraction of certain liabilities in reserve in specified
assets. The Federal Reserve can adjust reserve requirements by changing
required reserve ratios, the liabilities to which the ratios apply, or both.
Changes in reserve requirements can have profound effects on the money stock
and on the cost to banks of extending credit and are also costly to administer;
therefore, reserve requirements are not adjusted frequently. Nonetheless,
reserve requirements play a useful role in the conduct of open market
operations by helping to ensure a predictable demand for Federal Reserve
balances and thus enhancing the Federal Reserve’s control over the federal
funds rate. depository institutions to hold a certain fraction of their
deposits in reserve, either as cash in their vaults or as non-interest-bearing
balances at the Federal Reserve, does impose a cost on the private sector. The
cost is equal to the amount of forgone interest on these funds-or at least on
the portion of these funds that depository institutions hold only because of
legal requirements and not to meet their customers’ needs. burden of reserve
requirements is structured to bear generally less heavily on smaller
institutions. At every depository institution, a certain amount of receivable
liabilities is exempt from reserve requirements, and a relatively low required
reserve ratio is applied to receivable liabilities up to a specific level. The
amounts of receivable liabilities exempt from reserve requirements and subject
to the low required reserve ratio are adjusted annually to reflect growth in
the banking system. Changes in reserve requirements can affect the money stock,
by altering the volume of deposits that can be supported by a given level of
reserves, and bank funding costs. Unless it is accompanied by an increase in
the supply of Federal Reserve balances, an increase in reserve requirements
(through an increase in the required reserve ratio, for example) reduces excess
reserves, induces a contraction in bank credit and deposit levels, and raises
interest rates. It also pushes up bank funding costs by increasing the amount
of non-interest-bearing assets that must be held in reserve. Conversely, a
decrease in reserve requirements, unless accompanied by a reduction in Federal
Reserve balances, initially leaves depository institutions with excess
reserves, which can encourage an expansion of bank credit and deposit levels
and reduce interest rates. the 1960s and 1970s, the Federal Reserve actively
used reserve requirements as a tool of monetary policy in order to influence
the expansion of money and credit partly by manipulating bank funding costs. As
financial innovation spawned new sources of bank funding, the Federal Reserve
adapted reserve requirements to these new financial products. It changed
required reserve ratios on specific bank liabilities that were most frequently
used to fund new lending. Reserve requirements were also imposed on other,
newly emerging liabilities that were the functional equivalents of deposits,
such as Eurodollar borrowings. At times, it supplemented these actions by
placing a marginal reserve requirement on large time deposits -that is, an
additional requirement applied only to each new increment of these deposits.
the 1970s unfolded, it became increasingly apparent that the structure of
reserve requirements was becoming outdated. At this time, only banks that were
members of the Federal Reserve System were subject to reserve requirements
established by the Federal Reserve. The regulatory structure and competitive
pressures during a period of high interest rates were putting an increasing
burden on member banks. This situation fostered the growth of deposits,
especially the newly introduced interest-bearing transaction deposits, at
institutions other than member banks and led many banks to leave the Federal
Reserve System. Given this situation, policy makers felt that reserve
requirements needed to be applied to a broad group of institutions for more
effective monetary control-that is, to strengthen the relationship between the
amount of reserves supplied by the Federal Reserve and the overall quantity of
money in the economy. Monetary Control Act of 1980 (MCA) ended the problem of
membership attrition and facilitated monetary control by reforming reserve
requirements. Under the act, all depository institutions are subject to reserve
requirements set by the Federal Reserve, whether or not they are members of the
Federal Reserve System. The Board of Governors may impose reserve requirements
solely for the purpose of implementing monetary policy. The required reserve
ratio may range from 8 percent to 14 percent on transaction deposits and from 0
percent to 9 percent on non-personal time deposits. The Board may also set
reserve requirements on the net liabilities owed by depository institutions in
the United States to their foreign affiliates or to other foreign banks. The
MCA permits the Board, under certain circumstances, to establish supplemental
and emergency reserve requirements, but these powers have never been exercised.
the passage of the MCA in 1980, reserve requirements were not adjusted for
policy purposes for a decade. In December 1990, the required reserve ratio on
non-personal time deposits was pared from 3 percent to 0 percent, and in April
1992 the 12 percent ratio on transaction deposits was trimmed to 10 percent.
These actions were partly motivated by evidence suggesting that some lenders
had adopted a more cautious approach to extending credit, which was increasing
the cost and restricting the availability of credit to some types of borrowers.
By reducing funding costs and thus providing depository institutions with
easier access to capital markets, the cuts in required reserve ratios put
depository institutions in a better position to extend credit. reserve
requirement ratios have not been changed since the early 1990s, the level of
reserve requirements and required reserve balances has fallen considerably
since then because of the widespread implementation of retail sweep programs by
depository institutions. Under such a program, a depository institution sweeps
amounts above a predetermined level from a depositor’s checking account into a
special-purpose money market deposit account created for the depositor. In this
way, the depository institution shifts funds from an account that is subject to
reserve requirements to one that is not and therefore reduces its reserve
requirement. With no change in its vault cash holdings, the depository
institution can lower its required reserve balance, on which it earns no
interest, and invest the funds formerly held at the Federal Reserve in
interest-earning assets. Discount Window Federal Reserve’s lending at the
discount window serves two primary functions. It complements open market
operations in achieving the target federal funds rate by making Federal Reserve
balances available to depository institutions when the supply of balances falls
short of demand. It also serves as a backup source of liquidity for individual
depository institutions. the volume of discount window borrowing is relatively
small, it plays an important role in containing upward pressures on the federal
funds rate. If a depository institution faces an unexpectedly low balance in
its account at the Federal Reserve, either because the total supply of balances
has fallen short of demand or because it failed to receive an expected transfer
of funds from a counterparty, it can borrow at the discount window. This
extension of credit increases the supply of Federal Reserve balances and helps
to limit any upward pressure on the federal funds rate. At times when the
normal functioning of financial markets is disrupted-for example after
operational problems, a natural disaster, or a terrorist attack-the discount
window can become the principal channel for supplying balances to depository
institutions. discount window can also, at times, serve as a useful tool for
promoting financial stability by providing temporary funding to depository
institutions that are having significant financial difficulties. If the
institution’s sudden collapse were likely to have severe adverse effects on the
financial system, an extension of central bank credit could be desirable
because it would address the liquidity strains and permit the institution to
make a transition to sounder footing. Discount window credit can also be used
to facilitate an orderly resolution of a failing institution. An institution
obtaining credit in either situation must be monitored appropriately to ensure
that it does not take excessive risks in an attempt to return to profitability
and that the use of central bank credit would not increase costs to the deposit
insurance fund and ultimately the taxpayer. ordinary circumstances, the Federal
Reserve extends discount window credit to depository institutions under the
primary, secondary, and seasonal credit programs. The rates charged on loans
under each of these programs are established by each Reserve Bank’s board of
directors every two weeks, subject to review and determination by the Board of
Governors. The rates for each of the three lending programs are the same at all
Reserve Banks, except occasionally for very brief periods following the Board’s
action to adopt a requested rate change. The Federal Reserve also has the
authority under the Federal Reserve Act to extend credit to entities that are
not depository institutions in “unusual and exigent circumstances”; however,
such lending has not occurred since the 1930s. Credit credit is available to
generally sound depository institutions on a very short-term basis, typically
overnight. To assess whether a depository institution is in sound financial
condition, its Reserve Bank regularly reviews the institution’s condition,
using supervisory ratings and data on adequacy of the institution’s capital.
Depository institutions are not required to seek alternative sources of funds
before requesting occasional advances of primary credit, but primary credit is
expected to be used as a backup, rather than a regular, source of funding. rate
on primary credit has typically been set 1 percentage point above the FOMC’s
target federal funds rate, but the spread can vary depending on circumstances.
Because primary credit is the Federal Reserve’s main discount window program,
the Federal Reserve at times uses the term discount rate specifically to mean
the primary credit rate. Banks ordinarily do not require depository institutions
to provide reasons for requesting very short-term primary credit. Borrowers are
asked to provide only the minimum information necessary to process a loan,
usually the requested amount and term of the loan. If a pattern of borrowing or
the nature of a particular borrowing request strongly indicates that a
depository institution is not generally sound or is using primary credit as a
regular rather than a backup source of funding, a Reserve Bank may seek
additional information before deciding whether to extend the loan. credit may
be extended for longer periods of up to a few weeks if a depository institution
is in generally sound financial condition and cannot obtain temporary funds in
the market at reasonable terms. Large and medium-sized institutions are
unlikely to meet this test. Credit credit is available to depository
institutions that are not eligible for primary credit. It is extended on a very
short-term basis, typically overnight. Reflecting the less-sound financial
condition of borrowers of secondary credit, the rate on secondary credit has
typically been 50 basis points above the primary credit rate, although the
spread can vary as circumstances warrant. Secondary credit is available to help
a depository institution meet backup liquidity needs when its use is consistent
with the borrowing institution’s timely return to a reliance on market sources
of funding or with the orderly resolution of a troubled institution’s
difficulties. Secondary credit may not be used to fund an expansion of the borrower’s
assets. extended under the secondary credit program entail a higher level of
Reserve Bank administration and oversight than loans under the primary credit
program. A Reserve Bank must have sufficient information about a borrower’s
financial condition and reasons for borrowing to ensure that an extension of
secondary credit would be consistent with the purpose of the facility.
Moreover, under the Federal Deposit Insurance Corporation Improvement Act of
1991, extensions of Federal Reserve credit to an FDIC-insured depository
institution that has fallen below minimum capital standards are generally
limited to 60 days in any 120-day period or, for the most severely
undercapitalized, to only five days. Credit Federal Reserve’s seasonal credit
program is designed to help small depository institutions manage significant
seasonal swings in their loans and deposits. Seasonal credit is available to
depository institutions that can demonstrate a clear pattern of recurring
swings in funding needs throughout the year-usually institutions in
agricultural or tourist areas. Borrowing longer-term funds from the discount
window during periods of seasonal need allows institutions to carry fewer
liquid assets during the rest of the year and make more funds available for local
lending. seasonal credit rate is based on market interest rates. It is set on
the first business day of each two-week reserve maintenance period as the
average of the effective federal funds rate and the interest rate on
three-month certificates of deposit over the previous reserve maintenance
period. [see 14 p.29]
2.3 The Federal Reserve in
the International Sphere
activities of the Federal Reserve
and the international economy influence each other. Therefore, when deciding on
the appropriate monetary policy for achieving basic economic goals, the Board
of Governors and the FOMC consider the record of U.S. international
transactions, movements in foreign exchange rates, and other international
economic developments. And in the area of bank supervision and regulation,
innovations in international banking require continual assessments of, and
occasional modifications in, the Federal Reserve’s procedures and regulations.
Federal Reserve formulates policies that shape, and are shaped by,
international developments. It also participates directly in international
affairs. For example, the Federal Reserve occasionally undertakes foreign
exchange transactions aimed at influencing the value of the dollar in relation
to foreign currencies, primarily with the goal of stabilizing disorderly market
conditions. These transactions are undertaken in close and continuous
consultation and cooperation with the U.S. Treasury. The Federal Reserve also
works with the Treasury and other government agencies on various aspects of
international financial policy. It participates in a number of international
organizations and forums and is in almost continuous contact with other central
banks on subjects of mutual concern.Federal Reserve’s actions to adjust U.S.
monetary policy are designed to attain basic objectives for the U.S. economy.
But any policy move also influences, and is influenced by, international
developments. For example, monetary policy actions influence exchange rates.
The dollar’s exchange value in terms of other currencies is therefore one of
the channels through which U.S. monetary policy affects the U.S. economy. If
Federal Reserve actions raised U.S. interest rates, for instance, the foreign
exchange value of the dollar generally would rise. An increase in the foreign
exchange value of the dollar, in turn, would raise the price in foreign
currency of U.S. goods traded on world markets and lower the dollar price of
goods imported into the United States. By restraining exports and boosting
imports, these developments could lower output and price levels in the economy.
In contrast, an increase in interest rates in a foreign country could raise
worldwide demand for assets denominated in that country’s currency and thereby
reduce the dollar’s value in terms of that currency. Other things being equal,
U.S. output and price levels would tend to increase-just the opposite of what
happens when U.S. interest rates rise. Therefore, when formulating monetary
policy, the Board of Governors and the FOMC draw upon information about and
analysis of international as well as U.S. domestic influences. Changes in
public policies or in economic conditions abroad and movements in international
variables that affect the U.S. economy, such as exchange rates, must be
factored into the determination of U.S. monetary policy. , economic
developments in the United States, including U.S. monetary policy actions, have
significant effects on growth and inflation in foreign economies. Although the
Federal Reserve’s policy objectives are limited to economic outcomes in the
United States, it is mutually beneficial for macroeconomic and financial policy
makers in the United States and other countries to maintain a continuous
dialogue. This dialogue enables the Federal Reserve to better understand and
anticipate influences on the U.S. economy that emanate from abroad. increasing
complexity of global financial markets-combined with ever-increasing linkages
between national markets through trade, finance, and direct investment-have led
to a proliferation of forums in which policy makers from different countries
can meet and discuss topics of mutual interest. One important forum is provided
by the Bank for International Settlements (BIS) in Basel, Switzerland. Through
the BIS, the Federal Reserve works with representatives of the central banks of
other countries on mutual concerns regarding monetary policy, international financial
markets, banking supervision and regulation, and payments systems. (The
Chairman of the Board of Governors and the president of the Federal Reserve
Board of New York represent the U.S. central bank on the board of directors of
the BIS.) Representatives of the Federal Reserve also participate in the
activities of the International Monetary Fund (IMF) and discuss macroeconomic,
financial market, and structural issues with representatives of other
industrial countries at the Organization for Economicoperation and Development
(OECD). Following the Asian Financial Crises of 1997 and 1998, the Financial
Stability Forum (FSF) was established to enable central banks, finance
ministries, and financial regulatory authorities in systemically important
economies to work together to address issues related to financial stability.
The Federal Reserve also sends delegates to international meetings such as
those of the Asia Pacific Economic Cooperation (APEC) Finance Ministers’
Process, the G-7 Finance Ministers and Central Bank Governors, the G-20, and
the Governors of Central Banks of the American Continent. Currency Operations
Federal Reserve conducts foreign currency operations-the buying and selling of
dollars in exchange for foreign currency-under the direction of the FOMC,
acting in close and continuous consultation and cooperation with the U.S.
Treasury, which has overall responsibility for U.S. international financial
policy. The manager of the System Open Market Account at the Federal Reserve
Bank of New York acts as the agent for both the FOMC and the Treasury in
carrying out foreign currency operations. Since the late 1970s, the U.S.
Treasury and the Federal Reserve have conducted almost all foreign currency
operations jointly and equally. purpose of Federal Reserve foreign currency
operations has evolved in response to changes in the international monetary
system. The most important of these changes was the transition in the 1970s
from a system of fixed exchange rates-established in 1944 at an international
monetary conference held in Bretton Woods, New Hampshire-to a system of
flexible (or floating) exchange rates for the dollar in terms of other
countries’ currencies. Under the Bretton Woods Agreements, which created the
IMF and the International Bank for Reconstruction and Development (known
informally as the World Bank), foreign authorities were responsible for
intervening in exchange markets to maintain their countries’ exchange rates
within 1 percent of their currencies’ parities with the U.S. dollar; direct
exchange market intervention by U.S. authorities was extremely limited.
Instead, U.S. authorities were obliged to buy and sell dollars against gold to
maintain the dollar price of gold near $35 per ounce. After the United States
suspended the gold convertibility of the dollar in 1971, a regime of flexible
exchange rates emerged; in 1973, under that regime, the United States began to
intervene in exchange markets on a more significant scale. In 1978, the regime
of flexible exchange rates was codified in an amendment to the IMF’s Articles
of Agreement. flexible exchange rates, the main aim of Federal Reserve foreign
currency operations has been to counter disorderly conditions in exchange
markets through the purchase or sale of foreign currencies (called foreign
exchange intervention operations), primarily in the New York market. During
some episodes of downward pressure on the foreign exchange value of the dollar,
the Federal Reserve has purchased dollars (sold foreign currency) and has
thereby absorbed some of the selling pressure on the dollar. Similarly, the
Federal Reserve may sell dollars (purchase foreign currency) to counter upward
pressure on the dollar’s foreign exchange value. The Federal Reserve Bank of
New York also executes transactions in the U.S. foreign exchange market for
foreign monetary authorities, using their funds. the early 1980s, the United
States curtailed its official exchange market operations, although it remained
ready to enter the market when necessary to counter disorderly conditions. In
1985, particularly after September, when representatives of the five major
industrial countries reached the so-called Plaza Agreement on exchange rates,
the United States began to use exchange market intervention as a policy
instrument more frequently. Between 1985 and 1995, the Federal
Reserve-sometimes in coordination with other central banks-intervened to
counter dollar movements that were perceived as excessive. Based on an
assessment of past experience with official intervention and a reluctance to
let exchange rate issues be seen as a major focus of monetary policy, U.S.
authorities have intervened only rarely since 1995. dollar intervention
initiated by a foreign central bank also leaves the supply of balances at the
Federal Reserve unaffected, unless the central bank changes the amount it has
on deposit at the Federal Reserve. If, for example, the foreign central bank
purchases dollars in the foreign exchange market and places them in its account
at the Federal Reserve Bank of New York, then the supply of Federal Reserve
balances available to depository institutions decreases because the dollars are
transferred from the bank of the seller of dollars to the foreign central
bank’s account with the Federal Reserve. However, the Open Market Desk would
offset this drain by buying a Treasury security or arranging a repurchase
agreement to increase the supply of Federal Reserve balances to U.S. depository
institutions. Most dollar purchases by foreign central banks are used to
purchase dollar securities directly, and thus they do not need to be countered
by U.S. open market operations to leave the supply of dollar balances at the
Federal Reserve unchanged. Currency Resources main source of foreign currencies
used in U.S. intervention operations currently is U.S. holdings of foreign
exchange reserves. At the end of June 2004, the United States held foreign
currency reserves valued at $40 billion. Of this amount, the Federal Reserve
held foreign currency assets of $20 billion, and the Exchange Stabilization
Fund of the Treasury held the rest. The U.S. monetary authorities have also
arranged swap facilities with foreign monetary authorities to support foreign
currency operations. These facilities, which are also known as reciprocal
currency arrangements, provide short-term access to foreign currencies. A swap
transaction involves both a spot (immediate delivery) transaction, in which the
Federal Reserve transfers dollars to another central bank in exchange for
foreign currency, and a simultaneous forward (future delivery) transaction, in
which the two central banks agree to reverse the spot transaction, typically no
later than three months in the future. The repurchase price incorporates a
market rate of return in each currency of the transaction. The original purpose
of swap arrangements was to facilitate a central bank’s support of its own
currency in case of undesired downward pressure in foreign exchange markets.
Drawings on swap arrangements were common in the 1960s but over time declined
in frequency as policy authorities came to rely more on foreign exchange
reserve balances to finance currency operations. In years past, the Federal
Reserve had standing commitments to swap currencies with the central banks of
more than a dozen countries. In the middle of the 1990s, these arrangements
totaled more than $30 billion, but they were almost never drawn upon. At the
end of 1998, these facilities were allowed to lapse by mutual agreement among
the central banks involved, with the exception of arrangements with the central
banks of Canada and Mexico.currency arrangements can be an important policy
tool in times of unusual market disruptions. For example, immediately after the
terrorist attacks of September 11, 2001, the Federal Reserve established
temporary swap arrangements with the European Central Bank and the Bank of
England, as well as a temporary augmentation of the existing arrangement with
the Bank of Canada. The purpose of these arrangements was to enable the foreign
central banks to lend dollars to local financial institutions to facilitate the
settlement of their dollar obligations and to guard against possible
disruptions to the global payments system. The European Central Bank drew $23.5
billion of its swap line; the balance was repaid after three days. The other
central banks did not draw on their lines. The temporary arrangements lapsed
after thirty days. Federal Reserve is interested in the international
activities of banks, not only because it functions as a bank supervisor but
also because such activities are often close substitutes for domestic banking
activities and need to be monitored carefully to help interpret U.S. monetary
and credit conditions. Moreover, international banking institutions are
important vehicles for capital f lows into and out of the United States.
international banking activities are conducted depends on such factors as the
business needs of customers, the scope of operations permitted by a country’s
legal and regulatory framework, and tax considerations. The international activities
of U.S.-chartered banks include lending to and accepting deposits from foreign
customers at the banks’ U.S. offices and engaging in other financial
transactions with foreign counterparts. However, the bulk of the international
business of U.S.-chartered banks takes place at their branch offices located
abroad and at their foreign-incorporated subsidiaries, usually wholly owned.
Much of the activity of foreign branches and subsidiaries of U.S. banks has
been Eurocurrency business-that is, taking deposits and lending in
currencies other than that of the country in which the banking office is
located. Increasingly, U.S. banks are also offering a range of sophisticated
financial products to residents of other countries and to U.S. firms abroad.
international role of U.S. banks has a counterpart in foreign bank operations
in the United States. U.S. offices of foreign banks actively participate as
both borrowers and investors in U.S. domestic money markets and are active in
the market for loans to U.S. businesses. (See chapter 5 for a discussion of the
Federal Reserve’s supervision and regulation of the international activities of
U.S. banks and the U.S. activities of foreign banks.) banking by both
U.S.-based and foreign banks facilitates the holding of Eurodollar
deposits-dollar deposits in banking offices outside the United States-by
nonbank U.S. entities. Similarly, Eurodollar loans-dollar loans from banking
offices outside the United States-can be an important source of credit for U.S.
companies (banks and non-banks). Because they are close substitutes for
deposits at domestic banks, Eurodollar deposits of nonbank U.S. entities at
foreign branches of U.S. banks are included in the U.S. monetary aggregate.
Conclusion
Federal Reserve makes its own
contribution to the nation of economic and financial goals, working on finance
and credit in the economy. As the country’s central bank, it provides long-term
economic growth within its capacity, while ensuring reasonable price stability.
In a nutshell, the Fed seeks to implement its policies so as to combat the
deflationary and inflationary pressures as they arise. And as a lender of last
resort in a crisis situation, it is responsible for using the tools of their
policies in order to prevent a national crisis of liquidity and financial
panic.Reserve System has been entrusted to many monitoring and regulatory
functions. For example, it is liable for the amount of credit used for the
purchase or sale of securities, regulate overseas activities of all U.S. banks
and foreign banks. Monitors compliance with laws governing bank holding
companies, controls the banks, registered at the state and are members of the
Fed, sets rules to protect consumers' interests.the federal government, the
Federal Reserve System was designed to be a
compromise between national and regional powers.
Its regional base-the 12 Reserve Banks-makes the System more flexible and
innovative and ensures that its decisions and actions are broadly based. The
Board of Governors, acting as general overseer of the Reserve Banks, helps
coordinate the System's operations. And the System's most important
function-formulating and implementing monetary policy-is carried out in light
of both regional and national concerns by the FOMC, the Reserve Banks, and the Board
of Governors.Federal Reserve's major functions account for its structure and
for its unique position
in the federal government. Accountable to the government but working
independently within it, the System is able to
pursue its monetary policy goals without undue pressures from short-term
political considerations. Since its founding in 1913, the Federal Reserve
System has evolved to meet the needs of a changing financial system and a
growing economy. Its unique structure, however,
remains its most outstanding feature and its
greatest strength.
1. Dolan EJ. Etc. Money,
banking and monetary policy. Under the general. Ed. V. Lukashevich,
M.Yartseva.-St., 1994
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Stanley L. Brue. Economics. Principles, problems and policies. Volume 1. -M.:
"The Republic" .- 1992.
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investment banks and pricing in the market the first issue. / / USA: Economics,
Politics, ideologiya.-1994g.-N4.-pp.32-42.
. Noskov IJ Features of the
activities of transnational banks in the U.S.. / / Finansy.-1994g.-N9.-p.46.
5.
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http://www.federalreserve.gov/paymentsystems/fisagy_about.htm