Lecture 4 - The Fed and the ECB

Question 1

What objectives does the Federal Reserve Act require the Fed to meet?

Answer 1

• A high level of employment
• Stable price (i.e. low inflation)
• Moderate long-term interest rates

Question 2

What is the Euro-system composed of?

Answer 2

The ECB plus the national central banks (NCBS) of the member countries.

Question 3

What is the primary objective of the Euro-system?

Answer 3

to main price stability

Question 4

How is the Fed set up?

Answer 4

• central management board in Washington (the board of governors)
• 12 regional Federal Reserve Banks

Question 5

What is the FOMC?

Answer 5

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

Question 6

How often do the FOMC meet?

Answer 6

8 times a year

Question 7

Who carries out open market operations?

Answer 7

the New York Fed

Question 8

Who runs the ECB?

Answer 8

six-member executive board. They are appointed to non-renewable 8-year terms

Question 9

How many member does the governing council have?

Answer 9

26 - the executive board (6 people) and the Governors of each of the (currently 20) participating national central banks (NCBs)

Question 10

Has Ireland given up monetary policy to the ECB?

Answer 10

No it actively participates in making Euro-area monetary policy

Question 11

How often do the governing council meet to consider monetary policy

Answer 11

every six weeks

Question 12

What do NCBs do?

Answer 12

• monetary policy operations like print currency and operate payment systems

Question 13

How do the Euro-system and the Fed differ in relation to tasks

Answer 13

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

Question 14

How long are Fed Governors appointed for?

Answer 14

14 years - however is subject to presidential re-appointment every 4 years

Question 15

Is the Fed politically independent?

Answer 15

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

Question 15

Is the ECB politically independent?

Answer 15

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

Question 16

Independence form Fiscal Authorities:

Answer 16

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

Question 17

Banking supervision: The Fed

Answer 17

The Fed directly supervises large bank holding companies
The U.S. has a highly complex system of baking regulation and supervision

Question 18

Banking supervision: The ECB

Answer 18

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

Question 19

Lender of Last Resort: The Fed

Answer 19

The Fed operates the discount window program, which allows banks to borrow from it at any time.

Question 20

Article 13(3) of the Federal Reserve Act:

Answer 20

gives the Fed a mandate to lend during a crisis to individuals, partnerships or corporations that are not banks

Question 21

Article 13(3) changes

Answer 21

(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

Question 22

Lender of Last Resort: The ECB

Answer 22

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.

Question 23

Controversy over Emergency Liquidity Assistance (ELA)

Answer 23

• 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

Question 24

How do the meetings work? Fed

Answer 24

• staff presentations on recent developments
• discussion and vote on Chairman’s proposal

Question 25

How do they meetings work? ECB

Answer 25

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

Question 26

Communications: The Fed

Answer 26

After each meeting, the FOMC issues a statement
it gives an assessment of economic conditions and the risks of inflation

Question 27

Communications: The ECB

Answer 27

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

Question 28

How is the value of currency affected/influenced?

Answer 28

• inflation
• interest rates
• overall economic performance

Question 29

what are fiat currencies?

Answer 29

Modern currencies are fiat currencies, they are not directly back by the central bank’s assets like in the gold standard days