523 The Federal Reserve System and Monetary Policy 24.1
24 c h a p t e r
THE FUNCTIONS OF A CENTRAL BANK In most countries of the world, the job of manipulating the supply of money belongs to the central bank. A central bank has many functions. First, a central bank is a “banker’s bank.” It serves as a bank where commercial banks maintain their own cash deposits—their reserves. Second, a central bank performs a number of service functions for commercial banks, such as transferring funds and checks between various commercial banks in the banking system. Third, the central bank typically serves as the major bank for the central government, handling, for example, its payroll accounts.
Fourth, the central bank buys and sells foreign currencies and generally assists in the completion of financial transactions with other countries. Fifth, it serves as a “lender of last resort” that helps banking institutions in financial distress. Sixth, the central bank is concerned with the stability of the banking system and the supply of money, which, as you have already learned, results from the loan decisions of banks. The central bank can and does impose regulations on private commercial banks; it thereby regulates the size of the money supply and influences the level of economic activity. The central bank also implements monetary policy, which, along with fiscal policy, forms the basis of efforts to direct the economy to perform in accordance with macroeconomic goals.
LOCATION OF THE FEDERAL RESERVE SYSTEM In most countries, the central bank is a single bank; for example, the central bank of Great Britain, the Bank of England, is a single institution located in London. In the United States, however, the central bank is 12 institutions, closely tied together and collectively called the Federal Reserve System. The Federal Reserve System, or Fed, as it is nicknamed, has separate banks in Boston, New York, Philadelphia, Richmond, Atlanta, Dallas, Cleveland, Chicago, St. Louis, Minneapolis–St. Paul, Kansas City, and San Francisco. As Exhibit 1 shows, these banks and their branches are spread all over the country, but they are most heavily concentrated in the eastern states.
Each of the 12 banks has branches in key cities in its district. For example, the Federal Reserve Bank of Cleveland serves the fourth Federal Reserve district and has branches in Pittsburgh, Cincinnati, and Columbus. Each Federal Reserve Bank has its own board of directors and, to a limited extent, can set its own policies. Effectively, however, the 12 banks act in unison on major policy issues, with control of major policy decisions resting with the Board of Governors and the Federal Open Market Committee, headquartered in Washington, D.C. The Chairman of the Federal Reserve Board of Governors (currently Alan Greenspan) is generally regarded as one of the most 524 CHAPTER TWENTY-FOUR | The Federal Reserve System and Monetary Policy The Federal Reserve System s e c t i o n 24.1 _ What are the functions of a central bank?
_ Who controls the Federal Reserve System?
_ How is the Fed tied to Congress and the executive branch?
Commercial banks keep reserves with the central bank.
Roughly 4,000 U.S. banks are members of the Federal Reserve System. While this is less than half the number of total banks, the member banks hold roughly 75 percent of U.S. bank deposits. Furthermore, all banks must meet the Fed’s requirements, whether they are members or not.
© Don Couch Photography important and powerful economic policymakers in the country.
THE FED’S RELATIONSHIP TO THE FEDERAL GOVERNMENT The Federal Reserve System was created in 1913 because the U.S. banking system had so little stability and no central direction. Technically, the Fed is privately owned by the banks that “belong” to it.
All banks are not required to belong to the Fed; however, since the passage of new legislation in 1980, virtually no difference exists between the requirements of member and nonmember banks.
The private ownership of the Fed is essentially meaningless, because the Federal Reserve Board of Governors, which controls major policy decisions, is appointed by the president of the United States, not by the stockholders. The owners of the Fed have relatively little control over its operations and receive only small fixed dividends on their modest financial stake in the system. Again, the private ownership but public control feature was a compromise made to appease commercial banks opposed to direct public (government) regulation.
THE FED’S TIES TO THE EXECUTIVE BRANCH An important aspect of the Fed’s operation is that, historically, it has had a considerable amount of independence from both the executive and legislative branches of government. True, the president appoints the seven members of the Board of Governors, subject to Senate approval, but the term of appointment is 14 years. This means that no member of the Federal Reserve Board will face reappointment from the president who initially made the appointment, because presidential tenure is limited to two four-year terms. Moreover, the terms of board members are staggered, so a new appointment is made only every two years. It is practically impossible for a single president to appoint a majority of the members of the board, and even if it were possible, members have little fear of losing their jobs as a result of presidential wrath.
The chair of the Federal Reserve Board is a member of the Board of Governors and serves a fouryear term. The chair is truly the chief executive officer of the system and effectively runs it with considerable help from the presidents of the 12 regional banks.
FED OPERATIONS Many of the key policy decisions of the Federal Reserve are actually made by its Federal Open Market Committee (FOMC), which consists of the seven members of the Board of Governors; the president of the New York Federal Reserve Bank, and four other presidents of Federal Reserve Banks, who The Federal Reserve System 525 12 10 11 8 6 5 4 3 2 1 7 9 San Francisco Dallas Kansas City St. Louis Chicago Cleveland Atlanta Richmond Philadelphia New York Boston WASHINGTON Minneapolis NOTE: Both Hawaii and Alaska are in the Twelfth District.
Boundaries of Federal Reserve Districts and Their Branch Territories SECTION 24.1 EXHIBIT 1 526 CHAPTER TWENTY-FOUR | The Federal Reserve System and Monetary Policy “There have been three great inventions since the beginning of time: fire, the wheel and central banking,” quipped Will Rogers, an American humorist. Yet central banking as we know it today is an invention of the 20th century.
Central banks’ original task was not to conduct monetary policy or support the banking system, but to finance government spending. The world’s oldest central bank, the Bank of Sweden, was established in 1668 largely as a vehicle to finance military spending. The Bank of England was created in 1694 to fund a war with France. Even as recently as the late 1940s, a Labour chancellor of the exchequer, Stafford Cripps, took great pleasure in describing the Bank of England as “his bank.” Today most central banks are banned from financing government deficits.
The United States managed without a central bank until early this century. Private banks used to issue their own notes and coins, and banking crises were fairly frequent. But following a series of particularly severe crises, the Federal Reserve was set up in 1913, mainly to supervise banks and act as a lender of last resort. Today the Fed is one of the few major central banks still responsible for bank supervision; most countries have handed this job to a separate agency.
At first, governments in most countries kept a tight grip on the monetary reins, telling central banks when to change interest rates. But when inflation soared, governments saw the advantage of granting central banks independence in matters of monetary policy. Short-sighted politicians might try to engineer a boom before an election, hoping that inflation would not rise until after the votes had been counted, but an independent central bank insulated from political pressures would give higher priority to price stability. If, as a result of independence, policy is more credible, workers and firms are likely to adjust their wages and prices more quickly in response to a tightening of policy, and so, the argument runs, inflation can be reduced with a smaller loss of output and jobs. . . .
Several studies in the early 1990s confirmed that countries with independent central banks did indeed tend to have lower inflation rates (see Exhibit 2). And better still, low inflation did not appear to come at the cost of slower growth. . . . No central bank is completely independent. Before the ECB was set up, the German Bundesbank was the most independent central bank in the world, yet the German government chose to ignore its advice on the appropriate exchange rate for unification, and thereby stoked inflationary pressures. Some central banks, such as the Bank of England, have full independence in the setting of monetary policy, but their inflation target is set by the government.
Independent central banks are more likely to achieve low inflation than finance ministers because they have a longer time horizon. But independence is no panacea: central banks can still make mistakes. Note that Germany’s Reichsbank was statutorily independent when the country suffered hyperinflation in 1923.
SOURCE: “Monetary Metamorphosis,” The Economist, September 23, 1999.
INDEPENDENCE AND THE CENTRAL BANK In The NEWS Inflation, Annual Average Percentage 20 16 12 8 4 0 4 6 8 10 12 14 Index of Central-Bank Independence* zero = least independent 2 Portugal Japan Greece Austria Canada France Ireland Italy New Zealand Belgium Britain Netherlands Switzerland Germany United States Denmark *Calculated by V Grilli, D Masciandaro & G Tabellini Spain Australia Central Bank Independence and Inflation, 1960–1992 SECTION 24.1 EXHIBIT 2 There is often a strong positive correlation between a country’s average annual inflation rate and the degree of independence of its central bank.
http://sextonxtra.swlearning.com To work more with this Chapter’s concepts, log on to Sexton Xtra! now.
serve on the committee on a rotating basis. The FOMC makes most of the key decisions influencing the direction and size of changes in the money supply, and their regular, closed meetings are accordingly considered very important by the business community, news media, and government.
The Equation of Exchange 527 The chair of the Fed is truly the chief executive officer of the system. The Fed chair is required by law to testify to Congress twice a year. In addition to the chair, all seven members are appointed by the president and confirmed by the Senate to sit on the Board of Governors. Governors are appointed for 14-year terms, staggered every two years, in an attempt to insulate them from political pressure.
© Dennis Brack/Black Star 1. Of the six major functions of a central bank, the most important is its role in regulating the money supply.
2. There are 12 Federal Reserve banks in the Federal Reserve System. Although these banks are independent institutions, they act largely in unison on major policy decisions.
3. The Federal Reserve Board of Governors and the Federal Open Market Committee are the prime decision makers for U.S. monetary policy.
4. The president of the United States appoints members of the Federal Reserve Board of Governors to a 14-year term, with only one appointment made every two years. The president also selects the Chair of the Federal Reserve Board, who serves a four-year term. The only other government intervention in the Fed can come from legislation passed in Congress.
1. What are the six primary functions of a central bank?
2. What is the FOMC and what does it do?
3. How is the Fed tied to the executive branch? How is it insulated from executive branch pressure to influence monetary policy?
s e c t i o n c h e c k The Equation of Exchange s e c t i o n 24.2 ¡ What is the equation of exchange?
¡ What is the velocity of money?
¡ How is the equation of exchange useful?
As we discussed in the previous section, perhaps the most important function of the Federal Reserve is its ability to regulate the money supply. To fully understand the significant role that the Federal Reserve plays in the economy, we will first examine the role of money in the national economy.
THE EQUATION OF EXCHANGE The role that money plays in determining equilibrium GDP, the level of prices, and real output of goods and services has attracted the attention of economists for generations. In the early part of this century, economists noted a useful relationship that helps our understanding of the role of money in the national economy, called the equation of exchange.
The quantity equation can be presented as follows: M 3 V 5 P 3 Q where M is the money supply, however defined (usually M1 or M2); V is the velocity of money; P is the average level of prices of final goods and services; and Q is the physical quantity of final goods and services produced in a given period (usually one year).
The velocity of money refers to the “turnover” rate, or the intensity with which money is used.
Specifically, V represents the average number of times a dollar is used in purchasing final goods or services in a one-year period. Thus, if individuals are hoarding their money, velocity will be low; if individuals are writing lots of checks on their checking accounts and spending currency as fast as they receive it, velocity will tend to be high.
The expression P 3 Q represents the dollar value of all final goods and services sold in a country in a given year. Does that sound familiar? It should, because that is the definition of nominal gross domestic product (GDP). Thus, for our purposes, we may consider the average level of prices (P) times the physical quantity of final goods and services in a given time period (Q) to be equal to nominal GDP. We could say then, that MV 5 Nominal GDP, or V 5 Nominal GDP/M That is, in fact, the definition of velocity: The total output of goods in a year divided by the amount of money is the same thing as the average number of times a dollar is used in final goods transactions in a year.
The actual magnitude of V will depend on the definition of money that is used. For simplicity, let us use some hypothetical numbers to derive the velocity of money: V 5 Nominal GDP/M1 5 $10,000 billion /$1,000 billion 5 10 Using a broader definition of money, M2, the velocity of money equals V 5 Nominal GDP/M2 5 $10,000 billion/$4,000 billion 5 2.5 The average dollar of money, then, turns over a few times in the course of a year, with the precise number depending on the definition of money.
USING THE EQUATION OF EXCHANGE The equation of exchange is a useful tool when we try to assess the impact on the aggregate economy of a change in the supply of money (M). If M increases, then one of the following must happen: 1. V must decline by the same magnitude, so that M 3 V remains constant, leaving P 3 Q unchanged.
2. P must rise.
3. Q must rise.
4. P and Q must each rise some, so that the product of P and Q remains equal to MV.
In other words, if the money supply increases and the velocity of money does not change by an offsetting amount, there will be either higher prices (inflation), greater output of final goods and services, or a combination of both. If one considers a macroeconomic policy to be successful if output is increased but unsuccessful if the only effect of the policy is inflation, then an increase in M is an effective policy if Q increases but an ineffective policy if P increases.
Likewise, dampening the rate of increase in M or even causing it to decline will cause nominal GDP to fall, unless the change in M is counteracted by a rising velocity of money. Intentionally decreasing M can also either be good or bad, depending on whether the declining money GDP is reflected mainly in falling prices (P) or in falling output (Q).
Therefore, expanding the money supply, unless counteracted by increased hoarding of currency (leading to a decline in V), will have the same type of impact on aggregate demand as an expansionary fiscal policy—increasing government purchases, reducing taxes, or increasing transfer payments. Likewise, policies designed to reduce the money supply will have a contractionary impact (unless offset by a rising velocity of money) on aggregate demand, similar to the impact obtained from increasing taxes, decreasing transfer payments, or decreasing government purchases.
In sum, what these relationships illustrate is that monetary policy can be used to obtain the same objectives as fiscal policy. Some economists, often called monetarists, believe that monetary policy is the most powerful determinant of macroeconomic results.
528 CHAPTER TWENTY-FOUR | The Federal Reserve System and Monetary Policy HOW VOLATILE IS THE VELOCITY OF MONEY?
Economists once considered the velocity of money a given. We now know that it is not constant, but moves in a fairly predictable pattern. Thus, the connection between money supply and GDP is still fairly predictable. Historically, the velocity of money has been quite stable over a long period of time, and it has been particularly stable using the M2 definition.
However, velocity is less stable when measured using the M1 definition and over shorter periods of time. For example, an increase in velocity can occur with anticipated inflation. When individuals expect inflation, they will spend their money more quickly.
They don’t want to be caught holding money that is going to be worth less in the future. Also, an increase in the interest rates will cause people to hold less money. That is, people want to hold less money when the opportunity cost of holding money increases.
This, in turn, means that the velocity of money increases.
THE RELATIONSHIP BETWEEN THE INFLATION RATE AND THE GROWTH IN THE MONEY SUPPLY The inflation rate tends to rise more in periods of rapid monetary expansion than in periods of slower growth in the money supply. In Exhibit 1, we see the relationship between higher money growth and higher inflation rate in several countries. During the 1990s, when there was not as much inflation worldwide as there was in the 1970s and 1980s, it was more difficult to test this relationship.
The relationship between the growth in the money supply and higher inflation is particularly strong with hyperinflation—inflation greater than 50 percent. The most famous case of hyperinflation was in Germany in the 1920s—inflation was roughly 300 percent per month for more than a year. The German government incurred large amounts of debt during World War I and could not raise enough money to pay its expenses, so it printed huge amounts of money. The inflation was so bad that store owners would change their prices The Equation of Exchange 529 1000 900 800 700 600 500 400 300 200 100 0 100 200 300 400 500 600 700 800 900 1000 United States Mexico Poland Brazil Argentina Money Growth (percent per year) Inflation Rate (percent per year) Peru Money Supply Growth and Inflation Rates, 1980–1996 SECTION 24.2 EXHIBIT 1 There is often a strong positive correlation between a country’s average annual inflation rate and its annual growth in money supply.
in the middle of the day, firms had to pay workers several times a week, and many people resorted to barter. Recently, Brazil, Argentina, and Russia have all experienced hyperinflation. The cause of hyperinflation is simply excessive money growth—printing too much money.
530 CHAPTER TWENTY-FOUR | The Federal Reserve System and Monetary Policy 1. The equation of exchange is M 3 V 5 P 3 Q, where M is the money supply, V is the velocity of money, P is the average level of prices of final goods and services, and Q is the physical quantity of final goods and services produced in an economy in a given year.
2. The velocity of money (V) represents the average number of times that a dollar is used in purchasing final goods or services in a one-year period.
3. The equation of exchange is a useful tool when analyzing the effects of a change in the money supply on the aggregate economy.
1. If M1 is $10 billion and M1 velocity is 4, what is the product of the price level and real output? If the price level is 2, what does real output equal?
2. If nominal GDP is $200 billion and the money supply is $50 billion, what must velocity be?
3. If the money supply increases and velocity does not change, what will happen to nominal GDP?
4. If velocity is unstable, does stabilizing the money supply help stabilize the economy? Why or why not?
s e c t i o n c h e c k Implementing Monetary Policy: Tools of the Fed s e c t i o n 24.3 _ What are the three major tools of the Fed?
_ What is the purpose of the Fed’s tools?
_ What other powers does the Fed have?
HOW DOES THE FED MANIPULATE THE SUPPLY OF MONEY?
As noted previously, the Federal Reserve Board of Governors and the FOMC are the prime decision makers for U.S. monetary policy. They decide whether to expand the money supply and, it is hoped, the real level of economic activity, or to contract the money supply, hoping to cool inflationary pressures. How does the Fed control the money supply, particularly when it is the privately owned commercial banks that actually create and destroy money by making loans, as we discussed earlier?
The Fed has three major methods that it can use to control the supply of money: It can engage in open market operations, change reserve requirements, or change its discount rate. Of these three tools, the Fed uses open market operations the most. It is by far the most important device used by the Fed to influence the money supply.
OPEN MARKET OPERATIONS Open market operations involve the purchase and sale of government securities by the Federal Reserve System. At its regular meetings, the FOMC decides to buy or sell government bonds. For several reasons, open market operations are the most important method the Fed uses to change the money supply.
To begin, it is a device that can be implemented quickly and cheaply—the Fed merely calls an agent who buys or sells bonds. It can be done quietly, without a lot of political debate or a public announcement.
It is a rather powerful tool, as any given purchase or sale of securities has an ultimate impact several times the amount of the initial transaction.
When the Fed buys bonds, it pays the seller of the bonds by a check written on one of the 12 Federal Reserve banks. The person receiving the check will likely deposit it in his or her bank account, increasing the money supply in the form of added transaction deposits. More importantly, the commercial bank, in return for crediting the account of the bond seller with a new deposit, gets cash reserves or a higher balance in their reserve account at the Federal Reserve Bank in its district.
For example, suppose the Loans R Us National Bank has no excess reserves and that one of its customers sells a bond for $10,000 through a broker to the Federal Reserve System. The customer deposits the check from the Fed for $10,000 in his or her account, and the Fed credits Loans R Us with $10,000 in reserves. Suppose the reserve requirement is 10 percent. The Loans R Us National Bank, then, only needs new reserves of $1,000 ($10,000 3 0.10) to support its $10,000, meaning that it has acquired $9,000 in new excess reserves ($10,000 new actual reserves minus $1,000 in new required reserves). Loans R Us can, and probably will, lend out its excess reserves of $9,000, creating $9,000 in new deposits in the process. The recipients of the loans, in turn, will likely spend the money, leading to still more new deposits and excess reserves in other banks, as discussed in the previous chapter.
In other words, the Fed’s purchase of the bond directly creates $10,000 in money in the form of bank deposits and indirectly permits up to $90,000 in additional money to be created through the multiple expansion in bank deposits. (The money multiplier is 1/.10, or 10; 10 3 $9,000 5 $90,000.)
Thus, if the reserve requirement is 10 percent, a potential total of up to $100,000 in new money is created by the purchase of one $10,000 bond by the Fed.
The process works in reverse when the Fed sells a bond. The individual purchasing the bond will pay the Fed by check, lowering demand deposits in the banking system. Reserves of the bank where the bond purchaser has a bank account will likewise fall. If the bank had zero excess reserves at the beginning of the process, it now has a reserve deficiency.
The bank must sell secondary reserves or reduce loan volume, either of which leads to further destruction of deposits. Thus, a multiple contraction of deposits begins.
Open Market Activities and the Equation of Exchange Generally, in a growing economy where the real value of goods and services is increasing over time, an increase in the supply of money is needed even to maintain stable prices. If the velocity of money (V) in the equation of exchange is fairly constant and real GDP (denoted by Q in the equation of exchange) is rising between 3 percent and 4 percent a year (as it has since 1840), then a 3 percent or 4 percent increase in M is consistent with stable prices. We would expect, then, that over long periods, the Fed’s open market operations would more often lead to monetary expansion than monetary contraction. In other words, the Fed would more often purchase bonds than sell them. Moreover, in periods of rising prices, if V is fairly constant, the growth of M likely will exceed the 3 percent to 4 percent annual growth that appears to be consistent with long-term price stability.
THE RESERVE REQUIREMENT While open market operations are the most important and widely utilized tool that the Fed has to achieve its monetary objectives, it is not its potentially most powerful tool. The Fed possesses the power to change the reserve requirements of Implementing Monetary Policy: Tools of the Fed 531 How does the money supply increase as the result of open market operations?
For people to want to put more money in banks and less in government bonds, the Fed must offer bondholders an attractive price. If the Fed’s price is high enough, it will tempt some investors to sell their government bonds. When those individuals place the proceeds from the sale in the bank, new deposits are created, increasing reserves in the banking system. The excess reserves can then be loaned by the banks, creating more new deposits and increasing the excess reserves in still other banks.
OPEN MARKET OPERATIONS USING WHAT YOU'VE LEARNED A Q member banks by altering the reserve ratio. This can have an immediate, significant impact on the ability of member banks to create money. Suppose the banking system as a whole has $500 billion in deposits and $60 billion in reserves, with a reserve ratio of 12 percent. Because $60 billion is 12 percent of $500 billion, the system has no excess reserves.
Suppose now that the Fed lowers reserve requirements by changing the reserve ratio to 10 percent.
Banks, then, are required to keep only $50 billion in reserves ($500 billion 3 0.10), but they still have $60 billion. Thus, the lowering of the reserve requirement gives banks $10 billion in excess reserves.
The banking system as a whole can expand deposits and the money stock by a multiple of this amount, in this case 10 (10 percent equals 1/10; the banking multiplier is the reciprocal of this, or 10). The lowering of the reserve requirement in this case, then, would permit an expansion in deposits of $100 billion, which represents a 20 percent increase in the stock of money, from $500 to $600 billion.
When Does the Fed Use This Tool?
Relatively small reserve requirement changes can thus have a big impact on the potential supply of money. The tool is so potent, in fact, that it is seldom used. In other words, the power of the reserve requirement is not only its advantage but also its disadvantage because a very small reduction in the reserve requirement can make a huge change in the number of dollars that are in excess reserves in banks all over the country. Such huge changes in required reserves and excess reserves have the potential to disrupt the economy.
Frequent changes in the reserve requirement would make it very difficult for banks to plan. For example, a banker might worry that if she makes loans now, and then the Fed raises the reserve requirement, she would not have enough reserves to meet the new reserve requirements. If she does not make loans and the Fed leaves the reserve requirement alone, she loses the opportunity to earn income on those loans.
Carpenters don’t use sledgehammers to hammer small nails or tacks; the tool is too big and powerful to use effectively. Similarly, the Fed changes reserve requirements rather infrequently for the same reason, and when it does make changes, it is by very small amounts. For example, between 1970 and 1980, the Fed changed the reserve requirement twice, and less than 1 percent on each occasion.
THE DISCOUNT RATE Banks having trouble meeting their reserve requirement can borrow funds directly from the Fed. The interest rate the Fed charges on these borrowed reserves is called the discount rate. If the Fed raises the discount rate, it makes it more costly for banks to borrow funds from it to meet their reserve requirements.
The higher the interest rate banks have to pay on the borrowed funds, the lower the potential profits from any new loans made from borrowed reserves, and fewer new loans will be made and less money created. If the Fed wants to contract the money stock, it will raise the discount rate, making it more costly for banks to borrow reserves.
If the Fed is promoting an expansion of money and credit, it will lower the discount rate, making it cheaper for banks to borrow reserves.
The discount rate changes fairly frequently, often several times a year. Sometimes the rate will be moved several times in the same direction within a single year, which has a substantial cumulative effect.
532 CHAPTER TWENTY-FOUR | The Federal Reserve System and Monetary Policy © 1988 Thaves/Reprinted with permission.
The Significance of the Discount Rate The discount rate is a relatively unimportant tool, mainly because member banks do not rely heavily on the Fed for borrowed funds in any case. There seems to be some stigma among bankers about borrowing from the Fed; borrowing from the Fed is something most bankers believe should be reserved for real emergencies. When banks have short-term needs for cash to meet reserve requirements, they are more likely to take a very short-term (often overnight) loan from other banks in the federal funds market. For that reason, many people pay a lot of attention to the interest rate on federal funds.
The discount rate’s main significance is that changes in the rate are commonly viewed as a signal of the Fed’s intentions with respect to monetary policy. Discount rate changes are widely publicized, unlike open market operations, which are carried out in private and announced several weeks later in the minutes of the FOMC.
Implementing Monetary Policy: Tools of the Fed 533 By Colin Hurlock The Federal Reserve met again this week to decide whether or not to alter interest rates. But just how did the world’s most powerful central bank let everyone from Wall Street to Main Street know its decision?
Just how is this information, which can change the economic landscape and impact everything from the rate on new car loans to the interest on credit cards, disseminated to the public at large?
WAITING FOR THE CALL [S]hortly before 2PM ET Wednesday, members of the financial press squeeze into a small, poorly lit, dingy room at the Treasury Department across town and wait for a phone call from the influential Fed. Indeed, the room is so small that some of the 25 or so reporters who turn up have to wait in a back room.
At 2, the doors to the pressroom are closed. Then, sometime between 2 and 2:15 PM, a phone rings in the room—and what happens next has to be seen to be believed.
On the phone is Joseph Coyne, assistant [for public affairs] to the Board of Governors of the Federal Reserve. Coyne tells the one reporter who takes the call in the Treasury pressroom that either a fax is en route or that the Federal Open Market Committee meeting ended at a certain time and there will be no further announcement. (By the way, the reporter that takes the call is nearly always the Dow Jones reporter since Dow Jones is regarded as the leading disseminator of financial news in the United States.)
If Coyne tells the reporter that the FOMC meeting ended and there’ll be no further announcement, this means the central bank is leaving interest rates right where they are, although Coyne doesn’t specifically say that.
AT THE SOUND OF THE BELL After thanking Coyne, the reporter will then tell the others in the pressroom and they’ll all hurriedly fine-tune their stories to say, “Fed leaves interest rates unchanged,” or words to that effect.
...
Januszek66