The ECB vs. The Fed

1. The ECB vs. The Fed By: Kostas Konstantinou Rafael Vera Kanut Yang Shuo Zhang

2. 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).

3. 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

4. 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.

5. Objectives of The ECB • Three Main Objectives: • Maintain Price Stability • Support General Economic Policies of the European Union States • Ensure an Open Market Economy

6. 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.

7. 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.

8. 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

9. 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).

10. 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.

11. 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.

12. 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.

13. 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.