Lecture 4 - The Fed and the ECB Flashcards
What objectives does the Federal Reserve Act require the Fed to meet?
- A high level of employment
- Stable price (i.e. low inflation)
- Moderate long-term interest rates
What is the Euro-system composed of?
The ECB plus the national central banks (NCBS) of the member countries.
What is the primary objective of the Euro-system?
to main price stability
How is the Fed set up?
- central management board in Washington (the board of governors)
- 12 regional Federal Reserve Banks
What is the FOMC?
Federal Open Market Committee
Consists of twelve members: The 7 members of the Board of Governors, the President of the New York Fed, the four regional district Bank presidents.
Members of the FOMC are chosen by the president
How often do the FOMC meet?
8 times a year
Who carries out open market operations?
the New York Fed
Who runs the ECB?
six-member executive board. They are appointed to non-renewable 8-year terms
How many member does the governing council have?
26 - the executive board (6 people) and the Governors of each of the (currently 20) participating national central banks (NCBs)
Has Ireland given up monetary policy to the ECB?
No it actively participates in making Euro-area monetary policy
How often do the governing council meet to consider monetary policy
every six weeks
What do NCBs do?
- monetary policy operations like print currency and operate payment systems
How do the Euro-system and the Fed differ in relation to tasks
many tasks carried out by the Federal Reserve Board in Washington are de-centralized in the Euro-system e.g., forecasting, production of statistics, monitoring of public finances.
i.e. NCBs have more tasks/responsibilities than the 12 regional Federal Reserve Banks
How long are Fed Governors appointed for?
14 years - however is subject to presidential re-appointment every 4 years
Is the Fed politically independent?
By current international standards, the Fed is not very independent. The Fed’s decisions are not subject to Congressional approval, so in this sense it is politically independent.
But, its legal mandates could be changed at any time by Congress
Is the ECB politically independent?
The ECB is a highly independent central bank. It’s legal mandate is almost impossible to change
Members of Governing Council make decisions based on Euro-area considerations and cannot consult with politicians
Independence form Fiscal Authorities:
The ECB was set up to prevent it from financing deficits. However, there is nothing preventing the ECB or Euro-system NCBs from purchasing bonds of euro area governments in the secondary market as the ECB has done with its “Asset Purchase Programme”
The Fed is also prohibited from direct purchases of Treasury bonds
Banking supervision: The Fed
The Fed directly supervises large bank holding companies
The U.S. has a highly complex system of baking regulation and supervision
Banking supervision: The ECB
Euro area member states differ in how they handle banking supervision
Some have had national central banks perform this tasks while some have had separate agencies
In June 2012, it was decided that the ECB would become the “single supervisory mechanism” (SSM) for banks in the euro area
The ECB took on this role in late 2014 and is currently directly supervising 119 banks, representing over 80% of all bank assets in the euro area
Lender of Last Resort: The Fed
The Fed operates the discount window program, which allows banks to borrow from it at any time.
Article 13(3) of the Federal Reserve Act:
gives the Fed a mandate to lend during a crisis to individuals, partnerships or corporations that are not banks
Article 13(3) changes
(not politically popular)
- loans under 13(3) must now be approved by the Treasury Secretary
- the Fed can no longer make loans to individual firms
Lender of Last Resort: The ECB
The ECB makes loans to banks in a set of weekly operations
also operates a marginal lending facility which allows banks to borrow from it at any time - these loans must be collaterized
In crisis, banks can apply for Emergency Liquidity Assistance: these loans are provided by the NCBs but the programmes can be stopped if the ECB Governing Council votes with a two-thirds majority that they interfere with its other objectives.
Controversy over Emergency Liquidity Assistance (ELA)
- ELA was provided to banks that seemed insolvent
- The ECB’s option of removing ELA played a role in the timing and design of IMF-EU programmes in Ireland.. Cyprus, and Greece in the 2010s
- Failed banks that were nationalized (such as Anglo Irish Bank) has to pay back ELA loans and this resulted in large costs for the taxpayer
- In Cyprus in 2013, bank depositors lost money while ELA had been used to finance a bank run by better informed (richer) depositors
How do the meetings work? Fed
- staff presentations on recent developments
- discussion and vote on Chairman’s proposal
How do they meetings work? ECB
The accession of Lithuania to euro membership in 2015 brought the number of member states to 19 and this triggered a new voting system.
Euro area countries were divided into groups according to the size of their economies and their financial sectors
The governors from countries ranked first to fifth - Germany, France, Italy, Spain, and the Netherlands - share four voting rights. The other 15 share 11 voting rights. The Governors take turns using the rights on a monthly rotation
Communications: The Fed
After each meeting, the FOMC issues a statement
it gives an assessment of economic conditions and the risks of inflation
Communications: The ECB
The governing council issues a statement which is read out by the ECB president at a press conference - the president takes questions from journalists
transcripts and webcasts of the press conferences are available online
How is the value of currency affected/influenced?
- inflation
- interest rates
- overall economic performance
what are fiat currencies?
Modern currencies are fiat currencies, they are not directly back by the central bank’s assets like in the gold standard days
