The ECB vs. The FedThe ECB vs. The Fed

By:

Kostas Konstantinou

Rafael Vera

Kanut Yang

Shuo Zhang

Introduction

The purpose of this presentation is to give you a brief overview of the history, structure, objectives, and monetary policy strategies of The European Central Bank (ECB) and The Federal Reserve System (Fed).

History of The European Central Bank

Officially established on June 1st, 1998. Headquarters are located in Frankfurt, Germany. President is Jean-Claude Trichet. 13 Member countries: Belgium, Germany,

Ireland, Greece, Spain, France, Italy, Luxembourg, The Netherlands, Austria, Portugal, Slovenia, and Finland.

Currency: Euro (EUR), € Exchange rate: €1 = $1.36

Structure of The ECB

Modeled after the German Bundesbank.

Governed by a six member Executive Board of Directors.

Headed by a President and a Board of Governors.

Comprised of The ECB and the Local Central Banks of the 27 European Union Member States.

Objectives of The ECB

Three Main Objectives:Maintain Price StabilitySupport General Economic Policies of the European Union States

Ensure an Open Market Economy

Monetary Policy of The ECB

Price Stability is the main goal of The ECB’s Monetary Policy. Why?Leads to less fluctuation of the price

level.Reduces Inflation Risk Premium.Helps eliminate the real economic

costs affected by distorted inflation.

Monetary Policy Instruments of The ECB

Three Main Instruments: Open Market Operations:

Important tool for managing interest rates, market liquidity, and signaling the next policy movement.

Standard Facilities Minimum Reserves:

Provide stability of money market interest rates.

History of The Federal Reserve System

Founded by The United States Congress in 1913. Headquarters are located in Washington, D.C. Chairman is Ben Bernanke. 12 Federal Reserve District Banks: Boston, New

York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, Kansas City, and San Francisco.

Currency: U.S. Dollar (USD), $ Exchange rate: $1 = €.73

Structure of The Fed

Modeled after some of the oldest European central banks in history; such as, Sweden’s Riksbank (1668), the Bank of England (1694), and the Banque France (1800). Also, served as a loose model for the reestablishment of Germany’s Bundesbank after WWII.

Governed by The Federal Reserve Board of Governors, which includes the chairman, and The Federal Open Market Committee (FOMC).

Comprised of the 12 Federal Reserve Banks and the member banks (mostly commercial banks).

Objectives of The Fed

Four Main Objectives: Administer the U.S. Monetary Policy Supervise and regulate banking institutions Maintain the stability of the financial system Provide financial services to depository

institutions, the U.S. government, and foreign official institutions

Also, plays a major role in operating the nation’s payment system.

Monetary Policy of The Fed

Promoting effectively maximum employment, stable prices, and moderate long-term interest rates is the main goal of The Fed’s Monetary Policy.

Monetary Policy Instruments of The Fed

Three Main Instruments: Open Market Operations:

Consist of the purchase of sale of U.S. Treasury and Federal Agency securities.

Discount Rate: Discount Rate manipulation.

Reserve Requirements: Defined as the amount of funds that a depository

institution must hold in reserve in-order-to support specified deposit liabilities.

Critique & Conclusion

As can be seen from our analysis, The ECB and The Fed are following similar Monetary Policy strategies. Some key similarities between the two Banks are: Price Stability is a priority. Similar Inflation Targets are set. Focus is placed on signaling their decisions regarding

changes in short-term interest rates in advance.