| | | | | | | Curiosity 8.1: What Is the Fed? | | | | | | | | | | The United States does not have a single central bank like other countries. Instead its central banking activities, which consist of participating in the money markets and regulating banking activity, are carried out by a group of 12 regional central banks called district Federal Reserve Banks, located in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis. Collectively they are known as the Federal Reserve System. This system nonetheless acts just like a single central bank because of its centralized power structure. The power lies with the Washington, D.C.-based Federal Resists Board of Governors and the Federal Open Market Committee (FOMC). The former consists of seven members appointed by the president of the United States for 14-year terms (with a new term beginning every two years so that no one president can control the board). One of these members is appointed by the president to be chairman of this committee for a four-year period. He is called the "chairman of the Fed" (a woman has not yet filled this position, so it is not known by what name she would be called) and is generally regarded as the most powerful person in the Federal Reserve System, if not the most powerful civil servant in the country. The FOMC consists of the seven governors plus five of the district Reserve Bank presidents. In practice, monetary policy decisions are made by the Board of Governors, or by the Federal Open Market Committee which is dominated by the governors. This structure makes the Federal Reserve System act as though it were a single central bank. | | | | | |
| | | | | ances, about 40% of which are made with cash.) The term transactions balances is often used to refer to money balances suitable for use as a medium of exchange. | | | | | | | | | Other items exist, however, that can be used as media of exchange, although they are not as close substitutes for cash as are traveler's checks and checking account deposits. Savings accounts at banks, for example, can be turned quickly into cash without incurring major cost, as can term deposits. (Term deposits earn higher interest but are not accessible for a specified time unless a penalty is paid.) Subject to some restrictions, checks can be written on accounts at brokerage firms and balances in money mutual fund accounts. If we want a measure of money that is closely connected with spending, therefore, we should augment M 1 to include all items that can quickly be used for spending. This is the rationale behind M2, the broad definition of money, thought by many to be more closely related to economic activity than is M1. It adds to M1 other assets with check-writing features, such as money market deposit accounts, and other assets that can be turned into cash quickly with very little cost, such as savings deposits. Such assets are described as being very "liquid." Table 8.1 documents the difference between M1 and M2. | | | | | | | | | The official Fed aggregates, M1, M2, and M3 (M2 plus some less-liquid assets) are reported regularly in the business sections of many newspapers. Each Friday, for example, the Wall Street Journal publishes these data in a "Federal Reserve Data" column in its "Money & Investing" section. It must be noted that these measures are often revised substantially; short-run movements in monetary aggregates should not be taken too seriously. | | | | |
