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Real power in the system resides with the New York Fed, which conducts Open Market Operations, implements monetary policy, and deals with all international relations. Over time this concentration of influence has diffused, but only slightly. | Real power in the system resides with the New York Fed, which conducts Open Market Operations, implements monetary policy, and deals with all international relations. Over time this concentration of influence has diffused, but only slightly. | ||
During the 1970s '''Petrodollar Recycling''' was largely handled through the New York Fed, with 30 percent of Saudi Arabia's total portfolio (70% of their US assets) held in a New York Fed account in 1978.<ref>David E. Spiro, ''The hidden hand of American hegemony: petrodollar recycling and international markets,'' 1999. p113</ref> This upset Arthur Bums, Chairman of the Board of Governors, who saw this as an attempt by the New York Fed to reassert dominance.<ref>David E. Spiro, ''The hidden hand of American hegemony: petrodollar recycling and international markets,'' 1999. p108</ref> | |||
At the first board meeting, '''Benjamin Strong''', a Morgan man and Jekyll Island attendee, was elected governor. He would spend the next fourteen years working tirelessly alongside '''Montagu Norman''', Governor of the Bank of England from 1920 to 1944, to reinstate an international gold standard. Norman - like the Morgans - was a Nazi collaborator and member of the Anglo-german fellowship. He funded the rearmament of Germany with loans, transferred gold from Czech to Nazi bank accounts,<ref>Blaazer, David (2005). "Finance and the End of Appeasement: The Bank of England, the National Government and the Czech Gold". ''Journal of Contemporary History''. '''40''' (1): 25–39.</ref> and was a close personal friend of nazi central bank leader, '''Hjalmar Schact'''.<ref>Forbes, Neil (2000), "Doing Business with the Nazis"</ref> | |||
=== Monetary Operations === | === Monetary Operations === | ||
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First, and used more commonly than any other method since the 1980s, are '''Open Market Operations''' conducted by the New York Fed under the oversight of the Federal Open Market Committee. Primary dealers keep in contact through a dedicated desk at the NY Fed, and buy Governmental bonds from the fed using TRAPS (Trading Room Automated Processing System), a software used exclusively for these transactions. There are two types, defensive and dynamic. Defensive operations try to stabilize the market in response to some externality. For this reason, they are usually temporary measures like repo or matched sale-purchase agreements. Repo is when the fed buys securities with an understanding that they will be returned at a future data, and matched sale-purchase agreements are just the opposite, the Fed selling with an agreement for future re-acquisition. Dynamic operations, like that of Jerome Powel in March of 2023 to raise interest rates, are when the fed wants to make a change in the market, in this instance to fight inflation. | First, and used more commonly than any other method since the 1980s, are '''Open Market Operations''' conducted by the New York Fed under the oversight of the Federal Open Market Committee. Primary dealers keep in contact through a dedicated desk at the NY Fed, and buy Governmental bonds from the fed using TRAPS (Trading Room Automated Processing System), a software used exclusively for these transactions. There are two types, defensive and dynamic. Defensive operations try to stabilize the market in response to some externality. For this reason, they are usually temporary measures like repo or matched sale-purchase agreements. Repo is when the fed buys securities with an understanding that they will be returned at a future data, and matched sale-purchase agreements are just the opposite, the Fed selling with an agreement for future re-acquisition. Dynamic operations, like that of Jerome Powel in March of 2023 to raise interest rates, are when the fed wants to make a change in the market, in this instance to fight inflation. | ||
For an example of how this '''money creation''' might work, imagine a transaction between the Fed and Wells Fargo. Say the economy is slowing down and the Fed wants to gas it up, they might purchase 100 government securities from Wells Fargo. Wells Fargo will have less government securities (issued at the discretion of the Treasury), and Fed will have more. '''Under the federal reserve system, minimum reserves are set, and Banks are required to keep these | For an example of how this '''money creation''' might work, imagine a transaction between the Fed and Wells Fargo. Say the economy is slowing down and the Fed wants to gas it up, they might purchase 100 government securities from Wells Fargo. Wells Fargo will have less government securities (issued at the discretion of the Treasury), and Fed will have more. '''Under the federal reserve system, minimum reserves are set, and Banks are required to keep these reserves (RR) in an account at the Fed. So in return for the government issued securities, the Fed credits the account the Bank has with them. Just writes something on a line. This increases the Banks reserves, increasing the amount they can lend.''' In economese this increases the Monetary Base (and, necessarily, the Money Supply) by 100. If the bank chooses to keep it in currency rather than deposits, then reserves stay the same but the effect on the monetary base is the same. In the case of sales it is just the opposite and the money supply decreases. | ||
In the chart, purchases increase the amount of non-borrowed reserves, shifting the vertical portion of the supply curve right and thereby lowering the federal funds rate, leading to an increase in overall market liquidity. In the second, because the federal funds rate cannot fall below the interest rate paid on reserves, we hit the flat section and there is no effect on federal funds rate | In the chart, purchases increase the amount of non-borrowed reserves, shifting the vertical portion of the supply curve right and thereby lowering the federal funds rate, leading to an increase in overall market liquidity. In the second, because the federal funds rate cannot fall below the interest rate paid on reserves, we hit the flat section and there is no effect on federal funds rate | ||
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==== Requirement Ratio (Demand) ==== | ==== Requirement Ratio (Demand) ==== | ||
[[File:REQUIREMENT RATIO.png|thumb|301x301px|Requirement Ratio Diagram]] | [[File:REQUIREMENT RATIO.png|thumb|301x301px|Requirement Ratio Diagram]] | ||
Open Market Operations and the Discount Rate effect supply, but the Federal Reserve has two more methods, each effecting demand. First, they can change the '''requirement ratio''', which is the amount of reserves banks are required to keep in the with the fed. Because these reserves cannot be used for investment, ''increasing the required reserves '''increases demand,''' shifts demand for funds right, lowering the federal funds rate'' | Open Market Operations and the Discount Rate effect supply, but the Federal Reserve has two more methods, each effecting demand. First, they can change the '''requirement ratio''', which is the amount of reserves banks are required to keep in the with the fed. Because these reserves cannot be used for investment, ''increasing the required reserves '''increases demand,''' shifts demand for funds right, lowering the federal funds rate'', and vice-versa. | ||
==== Interest on Reserves (Demand) ==== | ==== Interest on Reserves (Demand) ==== | ||
[[File:INTEREST ON RESERVES1.png|thumb| | [[File:INTEREST ON RESERVES1.png|thumb|258x258px|Interest on Reserves Diagram]] | ||
Another way to affect demand is by changing interest on reserves. Until 2008, the Federal Reserve did not pay interest on reserves banks held with them | Another way to affect demand is by changing interest on reserves. Until 2008, the Federal Reserve did not pay interest on reserves banks held with them, when it was introduced as an additional form of leverage. Paying interest on reserves allows the Fed to place a floor on the federal funds rate (the horizontal line in the supply curve), because banks have little reason to lend at rates below the rate of interest they receive on their reserve balances. The rate is determined by the Board of Governors. | ||
==== Extraordinary Measures (2008) ==== | ==== Extraordinary Measures (2008) ==== |