Principles Of Econ 202

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Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

Economics 202

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

The Federal Reserve System

Principles Of Macroeconomics
Professor Yamin Ahmad

Supplemental Notes to Monetary
Policy
• The Federal Reserve System

• The Federal Reserve System, or the Fed, is the central bank of the United States.
• A central bank is the public authority that regulates a nation’s depository institutions and controls the quantity of money.

• Controlling the Quantity of Money
• Modeling Money: The Money Market

Note: These lecture notes are incomplete without having attended lectures

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

The Fed’s Goals and Targets

The Structure of the Fed

• The Fed conducts the nation’s monetary policy, which means that it adjusts the quantity of money in circulation.

• The key elements in the structure of the Fed are:

• The Fed’s goals are to keep inflation in check, maintain full employment, moderate the business cycle, and contribute to achieving long-term growth.
• In pursuit of its goals, the Fed pays close attention to interest rates and sets a target that is consistent with its goals for the federal funds rate, which is the interest rate that the banks charge each other on overnight loans of reserves.
Note: These lecture notes are incomplete without having attended lectures

 The Board of Governors
 The regional Federal Reserve banks
 The Federal Open Market Committee.

Note: These lecture notes are incomplete without having attended lectures

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

The Federal Reserve System

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

The Federal Reserve System

• The Board of Governors has seven members appointed by the president of the United States and confirmed by the Senate.
• Board terms are for 14 years and overlap so that one position becomes vacant every 2 years.
• The president appoints one member to a (renewable) four-year term as chairman.

Figure 1 shows the regions of the Federal
Reserve
System.

• Each of the 12 Federal Reserve Regional Banks has a nine-person board of directors and a president.
Note: These lecture notes are incomplete without having attended lectures

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

The Federal Reserve System
• The Federal Open Market Committee (FOMC) is the main policy-making group in the Federal Reserve
System.
• It consists of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and the 11 presidents of other regional Federal Reserve banks of whom, on a rotating basis, 4 are voting members. • The FOMC meets every six weeks to formulate monetary policy.
Note: These lecture notes are incomplete without having attended lectures

Note: These lecture notes are incomplete without having attended lectures

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

The Federal Reserve System
• The Fed’s Power Center
In practice, the chairman of the Board of
Governors (since 1987 Alan Greenspan) is the center of power in the Fed.
He controls the agenda of the Board, has better contact with the Fed’s staff, and is the
Fed’s spokesperson and point of contact with the federal government and with foreign central banks and governments.

Note: These lecture notes are incomplete without having attended lectures

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202

Formal Structure of the Federal Reserve

The Fed’s Policy Tools
• The Fed uses three monetary policy tools:
 Required reserve ratios

Federal Reserve system

Board of Governors

 The discount rate

The Federal Reserve System
• The Fed sets required reserve ratios, which are the minimum percentages of deposits that depository institutions must hold as
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