1 Chapter 4 Functions of the Fed Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. 2 Chapter Outline Organization of the Fed Monetary policy tools Impact of technical factors on funds Fed control of the money supply Monetary Control Act of 1980 Global monetary policy 3 Organization of the Fed The Fed has five major components: Federal Reserve district banks Member banks Board of Governors Federal Open Market Committee (FOMC) Advisory committees 4 Organization of the Fed (cont’d) Federal Reserve district banks There are 12 Federal Reserve district banks The NY bank is the most important Commercial banks that become members of the Fed must purchase stock in their district banks Pays a maximum dividend of 6% annually Each district bank has nine directors Six elected by member banks; three appointed by the Board of Governors The nine directors appoint the president of the district bank District banks clear checks, replace old currency, provide loans to depository institutions, and conduct research 5 Organization of the Fed (cont’d) Member banks All national banks are required to be members of the Fed State-chartered banks are not required to be members About 35% of all banks are members 6 Organization of the Fed (cont’d) Board of Governors The Board of Governors consists of seven members Each member is appointed by the President of the U.S. and confirmed by the Senate Members serve 14-year terms Reduces political pressure Terms are staggered so that one term expires in every even- numbered year Main roles: Regulate commercial banks Control monetary policy 7 Organization of the Fed (cont’d) Federal Open Market Committee (FOMC) The FOMC consists of the seven members of the Board of Governors plus the presidents of five Fed district banks NY plus four others on a rotating basis Goals: promote high employment, economic growth, and price stability Achieved through control of the money supply Decisions on changes in monetary policy are forwarded to the Trading Desk (Open Market Desk) at the NY Fed district bank 8 Organization of the Fed (cont’d) Advisory committees The Federal Advisory Council consists of one member from each district Makes recommendations to the Fed about economic and banking issues The Consumer Advisory Council consists of up to 30 members Represents the financial institutions industry and its consumers The Thrift Institutions Advisory Council consists of representatives of savings banks, S&Ls, and credit unions Offers views on issues specifically related to thrift institutions 9 Integration of Federal Reserve Components Advisory Committee Board of Governors • Regulates member banks and BHCs • Sets reserve requirements Supervision Federal Open Market Committee • Conducts open market operations Federal Reserve District Banks • Clear checks • Replace old currency • Provide loans to depository institutions 10 Monetary Policy Tools Open market operations The FOMC meets 8 times a year At each meeting, the target money supply growth level and interest rate level are determined FOMC meeting agenda Members receive the Beige Book two weeks prior to the meeting Meeting is attended by the Board of Governors, the 12 presidents of the district banks, and staff members Staff members begin with presentations about current economic conditions and recent economic trends Next, each FOMC member can offer recommendations about whether monetary growth and interest rate target levels should be changed Last, voting members vote on monetary policy and interest rates . 1 Chapter 4 Functions of the Fed Financial Markets and Institutions, 7e, Jeff. ©2006 by South-Western, a division of Thomson Learning. All rights reserved. 2 Chapter Outline Organization of the Fed Monetary policy tools Impact of