The US Federal reserve, usually referred to as the Fed, acts as both the central bank and one of the key regulators of the commercial banking system. The main board is based in Washington but there are also 12 regional reserve banks operating in what are referred to as Federal reserve Districts.
The main board has seven members drawn from the reserve banks in the Federal reserve Districts. The US President appoints these members with the appointments being ratified by the Senate. The members serve 14-year terms. This appointment system means that political interference is very limited and that the Fed has effective day-to-day political independence. Inevitably the board does work closely with whoever is the current incumbent of the position of secretary of the Treasur y even though they do not always see eye to eye.
The board is responsible for setting bank reserve requirements. It also shares responsibility with the regional reserve banks for establishing discount rate policy. Combined with open market operations these provide the principal tools for managing US monetary policy. It should be obvious that as the US Federal reserve is the world’s most powerful national central bank its monetary policies can have wide reaching effects in other countries, particularly those with currencies linked to the US$. The Federal Open-Market Committee (FOMC) meets on a regular basis, normally about once every six weeks, to establish a target Federal Funds rate and hence monetary policy necessary to achieve it. The Federal Funds rate is the rate that banks with surplus reserve deposits with a Federal reserve Bank charge on overnight funds to banks with a shortfall.
The Fed is able to influence the actual Federal Funds rate through open market operations by buying or selling Treasur y bills and notes in the market. Minutes of the meetings are published as are the voting records of the individual members in terms of their bias towards interest rate and monetary policy. In this context hawks favor tightening monetary policy and a bias towards higher rates and doves the opposite. The minutes and statement from the chairman are closely watched for signals on likely future Fed monetary and interest rate policies as they may have a significant impact on equity and bond markets not only in the US but around the world. The Fed is very careful of language and does not actually issue a formal bias statement but rather a “balance of risks” statement. Most people inter pret the latter as a statement of bias in any case.
The chairman of the Fed is also authorized by the FOMC to act if necessary between meetings. Such occasions are relatively rare, it is difficult to see when an emergency tightening of money supply would be necessary. There have only been three instances in recent memory when the Fed has pumped short-term liquidity into the market. One of those was flagged well in advance in the case of the Y2K switchover. The other two followed the collapse of the Long Term Credit Management group, a highly leveraged US hedge fund, which failed in dramatic style in 1998 largely due to positions it took in Russian instruments, and the reopening of US financial markets after the events of September 11th 2001.
Posts Tagged ‘financial market’
The US Federal Reserve
Monday, September 28th, 2009Market supply schedule
Sunday, September 13th, 2009How will producer-entrepreneurs respond to a change in product price? Other things constant, a higher price will increase the producer’s incentive to supply the good. Established producers will expand the scale of their operations, and over time new entrepreneurs, seeking personal gain, will enter the market and begin supplying the product, too. The law ly states that there is a direct (or positive) relationship between the price of a good or service and the amount of it that suppliers are willing to produce. This direct relationship means that price and the quantity producers wish to supply move in the same direction. As the price increases, producers will supply more-and as the price decreases, they will supply less.
Like the law of demand, the law of supply reflects the basic economic principle that incentives matter. Higher prices increase the reward entrepreneurs get from selling their products. The more profitable producing a product becomes, the more of it they will be willing to supply. Conversely, as the price of a product falls, so does its profitability and the incentive to supply it. Just think about how many hours of tutoring services you would be willing to supply for different prices. Would you be willing to spend more time tutoring students if instead of $5 per hour, tutoring paid $50 per hour? The law of supply suggests you would, and producers of other goods and services are no different.
Because there is a direct relationship between a good’s price and the amount offered for sale by suppliers, the supply curve has a positive slope. It slopes upward to the right. Read horizontally, the supply curve shows how much of a particular good producers are willing to produce and sell at a given price. Read vertically, the supply curve reveals important information about the cost of production. The height of the supply curve indicates both (I) the minimum price necessary to induce producers to supply that additional unit and (2) the opportunity cost of producing that additional unit. These are both measured by the height of the supply curve because the minimum price required to induce a supplier to sell a unit is precisely the marginal cost of producing it.