Central Banking 101 is a Branch Non-Fiction Book in the area of economics focused on central banking’s impact on the economy. The author, Joseph Wang, sat on the New York Fed’s Open Markets desk. The book gives a plain telling of central banking, market participants, and financial markets. The style is straight forward, and intelligible for an economics neophyte (I have only a basic understanding of supply v. demand, interest rates, etc.). The book is no-nonsense with a short introduction and no firm conclusion, focusing largely on content.
Chapter 1
Four Types of Money: p17-18. Prior to 2008, Fed controlled short term interest rates through scarcity in the Central Bank Reserves. After 2008, the Fed engaged in quantitative easing that greatly increased the reserve supply and now the Fed controls short term interest rates with the rate of interest it pays on reserves. p20. Fractional Reserve banking means that commercial banks hold only a fraction of the reserves against their deposits. Net deposit is unlikely to change much day-to-day and if it does in the wrong direction, the bank can borrow reserves. p26. After treasuries agency residential mortgage backed securities are the most secure but less liquid than treasuries p27. Interesting discussion of the ways in which the treasury system broke during 2008 and 2020 COVID panic. In 2020, investors were unable to sell treasuries and so everything started getting sold. p34. Deposits are an indicator of the amount of loans made by the banking system, they do imply money on the sidelines that will rush into stocks (buying stocks would just move deposits among holders).
Chapter Two
Money Creation Three money creators:
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The Fed
- The Federal reserves target rate is the federal funds rate
- A more plausible target rate is the Secured Overnight Funding Rate (SOFR) which the reference rate based on overnight repo transactions secured by Treasury collateral
- The Federal reserves target rate is the federal funds rate
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Commercial Banks
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The Treasury
Chapter 4 The Eurodollar Market
Role of the U.S. Dollar in Foreign Markets Eurodollar
Chapter 6 Money Markets
Chapter 7: Capital Markets
- Capital markets are where borrowers go to borrow from investors rather than banks
- In contrast to bank loans, capital financing do3es not increase the bank deposits in the system. Rather existent deposits are lent to other non-banks, allowing the money to be efficiently allocated to those that value the most.
Equity Markets
Debt Capital Markets
Debt capital markets are where companies or governments borrow money by issuing bonds. Bonds are IOUs by the borrower to repay bank deposits, i.e. use existing bank deposits more efficiently.
Chapter 8: Crisis Monetary Policy* Chapter 9 - Fed Watching
- New Monetary policy announced in 2019 introduced average inflation targeting and asymmetry in maximum employment. The later development said the Fed would alter course based on shortfalls to maximum employment but not overshoots. This change was made because of difficulty calculating full employment and flattening of the Phillips curve that links unemployment rate with inflation. The Average Inflation Target shoots for an average inflation of 2% where previous undershoots can be compensated for by overshoots. This allows the Fed to print even when inflation is over 2%.
- Modern Monetary Theory