Central banks use various monetary policy tools to achieve economic goals like price stability, full employment, and economic growth. These tools include reserve requirements, the discount rate, and open market operations. Reserve requirements and the discount rate affect the cost of credit, while open market operations influence the supply of reserves and interest rates. The Federal Reserve uses these tools and interest rate targeting to balance its objectives, though tightening credit to curb inflation may slow growth and raise unemployment, highlighting conflicts between goals.
This describes the Philippine Monetary Policy. This slideshow contains a brief history of the Philippine Monetary System and of the Bangko Sentral ng Pilipinas. This also contains the functions of money and how the BSP uses it to the Philippines' advantage.
This describes the Philippine Monetary Policy. This slideshow contains a brief history of the Philippine Monetary System and of the Bangko Sentral ng Pilipinas. This also contains the functions of money and how the BSP uses it to the Philippines' advantage.
The Federal Reserve and Money SupplyTakes s.docxcherry686017
The Federal Reserve and Money Supply
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Takes sections for chapters 10, 14, & 15 from the Mishkin text (9th edition), Federal Reserve reader, and www.federalreserve.gov
Chpt 10
3 key players
1. Depositors
2. Banks
3. Federal Reserve
Depositors are the most important providers of funds and they are the biggest users of fundsIf depositors lose confidence bank runs can occur, causing banks to lose their sources of funds If depositors have confidence banks have an increase amount of funds
Banks are the keepers of depositors funds
As before our deposits are their biggest liabilities, but their greatest assets
Balance Sheet is the most important document to understand the banking system
It is made up of two broad categories
Liabilities (Sources of Funds)
Assets (Uses of Funds)
Listed from most liquid to least liquid
Liabilities are simply the sources of funds
Checkable deposits
Payable on demand
Considered to be an asset for depositor (us)
Lowest cost of sources for banks we want easy access to liquidity
Only 6% of total liabilities (per the Fed)
Nontransaction deposits
CDs
Owners cannot write checks against such accounts
Primary source of bank funds (53% of bank liabilities)
Checkable deposits intterest paid on deposits has accounted for 25% of total bank operating expenses while the costs involved in servicing accounts (employee salaries, building, rent) has roughly 50% of operating expenses!
Liabilities Cont.
Discount Loans / Fed Fund (31% of liabilities)
Discount loans are loans from the Federal Reserve (also known as advances)
Typically 1%-pt above the fed funds rate
Banks typically do not want to borrow from the Fed unless absolutely necessary!
Fed Funds loan (overnight loans)
Federal funds are overnight borrowings by banks to maintain their bank reserves at the Federal Reserve
Transactions in the federal funds market allow banks with excess reserve balances to lend reserves to banks with deficient reserves
These loans are usually made for one day only (‘overnight’).
Bank Capital (10% of liabilities)
Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions.
Typically referred to as the uses of fundsThe interest payments earned on them are what enable banks to make profits.
Reserve Requirements
These are deposits plus currency that is physically held by banks.
Reserves are made up by required reserves and excess reserves
Required Reserves: For every dollar of checkable deposits at a bank (a fraction must be kept as reserves)
Excess Reserves: The most liquid of all bank assets and the bank can use them to make other loans to banks (through the fed funds market) or other loans.
Cash Items in Collection Process
Checks in process of being cleared from another bank
Correspondent banking
Common in small banks
Small banks hold deposits in larger banks in exchange for a variety of services, including check collection, foreign exchange tran ...
Surname 1Surname 6The open market operation in the F.docxmattinsonjanel
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The open market operation in the Federal Reserve
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Q. 1.
The effects of open market operation using T-accounts
Through the open market the Federal Reserve is able to influence the market by affecting the expectation of the participants in the market and changing the supply of money. The open market operation mainly entails the sales of reserves securities or the purchase that represents a considerable amount of trading in the market. The purchase of dollars from the public has the impact on the financial markets such as U.S dollar exchange rates, Treasury bond, Eurodollar and Treasury bill. Therefore, the main purpose of this essay is to address the impact of open market of the Federal Reserve on the fiscal markets.
The open market operation is the key tool used by the central bank or Federal Reserve to implement the monetary policies that enable the sales and purchase of securities. Therefore this tool plays a major role in the supply of funds and maintaining the Federal Reserve’s rate which is the main objective of the committee established by the Federal Open Market. However, the security that is certified to be sold or purchased and supplied by the Federal Reserve is limited by the authority that conducts the Open Market Operation.
Q. 2.
The Current Federal Funds Rate
Federal funds rate is the interest rate used by the depository institution to lend moneys overnight to other bank institution as per the Federal Reserve regulations. Federal funds rate which is the most persuasive interest rates is only usable to the creditworthy institutions depending on their transactions overnight. The interest rate that is paid by the borrowing bank is negotiated by the two banks and the weighted average is determined bearing in mind the Federal
Reserve’s effective rates. In addition, the target rate of the federal is determined after a lengthy discussion with the Federal Open Market group members.
Open market is used to ensure effectiveness in the federal funds rate and influence the money supply in the economy of most countries like U.S. The weighted average of federal reserves is mostly calculated after closing the transactions of the previous day. However, according to the current statistics the federal rates have been influenced or affected by the groups of brokers. Therefore the rates fluctuate depending on the high and low rates transacted by the ICAP’s brokers.
As per the Federal reserves, discount rates is the charged interest rate directed to the depository institutions like the commercial banks depending on the loan received and the lending facility used. Three discount programs are being offered by the Federal funds banks to bank institution namely: seasonal credit, secondary credit and primary credit. The short-terms rates of the federal have declined since 2003 due to the high volatility that affected the fund rates. From the analysis of the key factors that influence t ...
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Week 2 Textbook Problems
Week 2 Textbook Problems
2Scroll Down to Check Second Set of Answers
Week II Textbook Problems
FIN/366 – Financial Institutions
Week II Textbook Problems
Ch. 4 Questions and Applications
#1. The Fed Briefly describe the origin of the Federal Reserve System. Describe the functions of the Fed district banks
The United States experienced several banking panics in the 1800s and early 1900s and a major crisis in 1907. Congress established a central bank and in 1913, and the Federal Reserve Act was implemented, which established requirements for the commercial banks that chose to become members. The functions of the Fed district banks is to facilitate operations within the banking system by, replacing old currency, clearing checks, and to provide loans to depository institutions that need of funds.
#3. Open Market Operations Explain how the Fed increases the money supply through open market operations.
According to the text, The Fed’s purchase of government securities has a different impact than a purchase by another investor would have because the Fed’s purchase results in additional bank funds and increases the ability of banks to make loans and create new deposits. An increase in funds can allow for a net increase in deposit balances and therefore an increase in the money supply.
#4. Policy Directive What is the policy directive, and who carries it out?
If the FOMC determines a change it is reported through a statement; policy statement; to the Trading Desk that is carried out by the Feds.
#6.Reserve Requirements How is money supply growth affected by an increase in the reserve requirement ratio?
According to the text “when the reserve requirement ratio is reduced, the bank's deposits that can be lent out by depository institutions increases. When the loaned funds are spent, some of them will return to the depository institutions in the form of new deposits. The lower the reserve requirement ratio, the greater the lending capacity of depository institutions. A change in bank required reserves can cause a larger change in the money supply.
#14.The Fed's Impact on Unemployment Explain how the Fed's monetary policy affects the unemployment level.
Fed's monetary policy Each central bank has its own local interest rate that it might influence with monetary policy in order to control its local economy he Fed's monetary policy affects the unemployment level has a major influence so price stability (low inflation) and economic growth (low unemployment).
#15.The Fed's Impact on Home Purchases Explain how the Fed influences the monthly mortgage payments on homes. How might the Fed indirectly influence the total demand for homes by consumers?
The Fed's influence the monthly mortgage payments on homes because monetary policy affects interest rates. Their strong influence on the cost of borrowing can affect the amount of monthly payments on mortgages. Fed indirectly influence the total demand for homes b.
Derivatives
Historical - Presentation from 2007, slides mention Lehman - which obviously doesn't exist for reasons we all know - the subject explores in depth - Derivatives.
1. 14 C h a p t e r The Tools and Goals of Central Bank Monetary Policy Money and Capital Markets Financial Institutions and Instruments in a Global Marketplace Eighth Edition Peter S. Rose McGraw Hill / Irwin Slides by Yee-Tien (Ted) Fu
2. Learning Objectives To understand how the policy tools available to central banks work in carrying out a nation’s money and credit policies. To explore the strengths and weaknesses of the various monetary policy tools. To learn how the Federal Reserve System controls U.S. credit and interest rate levels. To see how central bank policy actions affect a nation’s economic goals.
3. Introduction Central banks are given the task of regulating the money and credit system in order to achieve the economic goals of full employment, a stable price level, sustainable economic growth, and a stable balance-of-payments position with the rest of the world. Although these objectives are not easy to achieve and often conflict, the central bank has powerful policy tools at its disposal.
4. General versus Selective Credit Controls General credit controls affect the entire banking and financial system. Examples: reserve requirements, the discount rate, open market operations Selective credit controls affect specific groups or sectors of the financial system. Examples: moral suasion, margin requirements on the purchase of listed securities
5. Reserve Requirements In the U.S., all depository financial institutions (including nonmembers) are required to conform to the deposit reserve requirements set by the Fed. Changes in reserve requirements are a very potent, though little-used tool. Indeed, reserve requirements have recently been reduced in the U.S., and eliminated in Canada, New Zealand, and the U.K.
6. Reserve Requirements Current Levels of Reserve Requirements for Depository Institutions in the U.S. Source: Board of Governors of the Federal Reserve System, October 2001
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8. reduces the amount of excess legal reserves - institutions deficient in required legal reserves will have to sell securities, cut back on loans, or borrow reserves
13. The Discount Rate 14 - 11 Note: Intended federal funds rate effective 12/11/2001 = 1.75% Source: http://www.frbdiscountwindow.org/, April 2002
14. Open Market Operations Open market operations in the U.S. consist of the buying and selling of U.S. government and other securities by the Federal Reserve System to affect the quantity and growth of legal reserves, and ultimately, general credit conditions. Open market operations are a most flexible policy tool, suitable for fine-tuning the financial markets.
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17. Types of Federal Reserve Open Market Transactions Securities Securities Dealer Dealer Federal Reserve bank Federal Reserve bank Reserves Reserves Dealer’s bank Dealer’s bank Reserves Reserves Securities returned Securities returned RP or Reverse RP Transaction (temporary change in the level of reserves held by depository institutions) RP: Fed buys securities temporarily Reverse RP: Fed sells securities temporarily Later on: Later on:
18. Types of Federal Reserve Open Market Transactions Maturing Treasury securities Federal Reserve bank Treasury Pays cash Sells more securities to raise more cash Dealer Orders bank to pay for the new securities Reserves Dealer’s bank Run-Off Transaction (permanent reduction in the level of reserves held by depository institutions)
19. Types of Federal Reserve Open Market Transactions Places order for securities through a Federal Reserve bank which then contacts dealer Federal Reserve customer Dealer Delivers securities Orders payment to dealer Dealer’s bank Customer’s bank Reserves Agency Transaction (Type A) (no change in the total level of reserves held by all depository institutions)
20. Types of Federal Reserve Open Market Transactions Federal Reserve customer Places order for securities Federal Reserve bank Securities delivered from Fed’s own portfolio Orders payment to Fed Reserves Customer’s bank Agency Transaction (Type B) (permanent reduction in the level of reserves held by depository institutions)
21. Open Market Operations Defensive open market operations are technical adjustments in market conditions to preserve the status quo and to maintain the present pattern of interest rates and credit availability. In contrast, dynamic open market operations are designed to upset the status quo and to change interest rates and credit conditions to a level the Fed believes to be more consistent with its economic goals.
22. Selective Credit Controls Used by the Fed Moral suasion refers to the use of “arm-twisting” or “jawboning” by central bank officials to encourage lending institutions and the public to conform with the spirit of its policies.
23. Selective Credit Controls Used by the Fed Margin requirements on the purchase of stocks and convertible bonds and on short sales of securities limit the amount of credit that can be used as collateral for a loan. Since 1974, the U.S. margin requirement on stocks, convertible bonds, and short sales has been 50% of the market value of the securities.
24. Interest Rate Targeting In recent years, the Federal Reserve has given increasing weight to targeting the cost and availability of credit in the money market (in particular, the daily average interest rate on federal funds transactions). The Fed achieves its target through open market operations that impact primarily the nonborrowed reserves (and hence the total reserves) available to the banking system.
25. Interest Rate Targeting The Fed supplies more reserves When the demand for reserves Federal Funds Interest Rate (%) D’ S’ D S Such that the federal funds rate is maintained at the desired level E’ E Supply of Reserves ($)
26. Monetary Policy Targets Instrumental Targets (the federal funds rate & the growth of total reserves) Intermediate Targets (money & credit growth & long-term interest rates) Final Targets (low unemployment & inflation, sustainable economic growth, & a stable international balance-of-payments position) Operating Targets (borrowed & nonborrowed reserves)
27. The Federal Reserve and Economic Goals The Goal of Controlling Inflation Inflation creates undesirable distortions in the allocation of scarce resources. In the 1990s, several central banks (such as New Zealand, Canada, and U.K.) began setting target inflation rates or rate ranges. The U.S. has not set an explicit inflation rate target – it pursues price stability and full employment simultaneously.
28. The Federal Reserve and Economic Goals The Goal of Full Employment The Employment Act of 1946 committed the U.S. government to minimizing unemployment as a major national goal.
29. The Federal Reserve and Economic Goals The Goal of Sustainable Economic Growth The Federal Reserve has declared that one of its most important long-term goals is to keep the economy growing at a relatively steady and stable rate – that is, a rate high enough to absorb increases in the labor force and prevent the unemployment rate from rising but slow enough to avoid runaway inflation.
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32. The Trade-offs Among Economic Goals However, there is growing research evidence that full employment and price stability (the absence of serious inflation) are compatible with each other in the longer term. This definition of sustainable long-run full employment is often referred to by economists as the NAIRU – the non-accelerating inflation rate of unemployment.
33. The Limitations of Monetary Policy Central banks cannot completely control financial conditions or the money supply. Changes in the economy feed back on the money supply and the financial markets. The structure of the economy is changing due to deregulation, internationalization, technological developments, etc., such that changes in domestic interest rates are probably not as potent a factor affecting the economy as they were a decade ago.
34. Money and Capital Markets in Cyberspace Most central banks maintain comprehensive websites, including information on what tools they normally use to carry out their money and credit policy. Visit, for example, http://www.federalreserve.gov/ http://www.bankofcanada.ca/en/ http://www.bankofengland.co.uk/ http://www.rbnz.govt.nz/ http://www.bis.org/cbanks.htm
35. Chapter Review Introduction General versus Selective Credit Controls General Credit Controls of the Fed Reserve Requirements The Discount Rate Open Market Operations Selective Credit Controls Used by the Fed Moral Suasion by Central Bank Officials Margin Requirements
36. Chapter Review Interest Rate Targeting The Federal Funds Rate The Federal Reserve and Economic Goals The Goal of Controlling Inflation The Goal of Full Employment The Goal of Sustainable Economic Growth Equilibrium in the U.S. Balance of Payments and Protecting the Dollar
37. Chapter Review The Trade-offs Among Economic Goals The Limitations of Monetary Policy