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