Abstract
The US Federal Reserve and the European Central bank perform the function of formulating the monetary policy of US and Euro zone. The banks use different tools to formulate the policy as discussed in the paper. The structures of these banks are analyzed. The two banks have recently adopted different security policies that have caused the US treasury to run out of funds. Federal Reserve together with other banks plays a role of controlling the money supply, and this means that the banks shape the financial system of the world. A policy adopted to delay dividends shows that these banks observe ethics, and they are economically sensitive.
The European Central Bank was founded in 1998 by the seventeen states that form the Euro zone. The states signed a treaty known as the treaty of Amsterdam when they formed this bank. The ECB is the head of all banks in the Euro zone, and it dictates the monetary policy of the zone; its headquarters are in Germany. The main functions of ECB are; to stabilize prices in the region, control operations of financial markets, and store foreign reserves (Langin, 2011).
The Federal Reserve was found in 1913 under the Federal Act; it is the central bank of America. The bank was formed to control prices in America and prevent the region from facing financial crisis like the ones it had faced before the bank was formed. Other functions of the Fed are to moderate interest rates and increase employment in the country.
The Federal Open Market Committee is a group of twelve people that is headed by a chairperson; the committee controls the monetary policy of the United States; it controls the money supply and interest rates of the country. The president of the Federal Reserve is the vice chairperson of the committee. The primary role of the committee is to control open market operations. The Federal reserve makes use of certain tools to control the money supply in US; these tools include the discount rate, Open Market Operations, and reserve requirements. OMO is used to alter money supply directly by selling or buying treasury securities (Langin, 2011). Required reserves refer the amount of dollars that the Fed requires banks to save in it; the discount rate is the rate charged to financial institutions when lending them with the money.
The governing council performs the task of controlling open market operations. The council uses four tools to control the operations; the tools include the main refinancing operations that take place on a weekly basis, structural, long term and long term refinancing operations. These operations control the liquidity of the banking system in the Euro zone.
The ECB concentrates on the main refinancing operations while the Federal Reserve concentrates on the open market operations.
The Federal Reserve is divided into five parts; these parts are the board of governors, twelve banks located in different parts of the country, advisory councils, private banks that are spread in the country, and the Federal Open Market Committee that has twelve members.
The ECB has three councils that perform different tasks; these councils include the governing council, the executive, and the general council. The general council co-ordinates all activities of the Euro zone, and it registers new countries (Langin, 2011). The executive council controls the daily activities of the bank while the governing council formulates monetary policy and sets the interest rate of the zone.
When ECB has bought treasury bills from US, money supply in US increases in the form of foreign exchange reserves. This is because the ECB pays the Fed Euros in exchange of the bills. Increase in money supply causes high inflation in the US economy; increase in money supply also results to high lending capacity of US banks because the Fed lends money to these banks. Interest rates in US go down while the interest rate in Europe rises because of a decrease in money supply in Europe. Foreign banks borrow money from US because of the low interest rate in US banks.
Sale of treasury bills to the Fed by ECB leads to decrease in money supply in US while money supply in Euro zone goes up. The decrease in money supply in US leads to stringent lending policy. Inflation rate in US goes down while it goes up in the Euro zone. The US banks borrow money from Europe. As a result, the economy grows due to low rates of inflation.
In September 2011, the Federal Reserve increased the period of maturity of securities to one hundred months in 2012 (Meaning, 2012). The ECB, on the other hand, adopted a policy to buy bonds that mature between twelve to thirty six months. The increase in the maturity of the securities has caused the US treasury to face debts because ECB cannot purchase securities that mature after thirty-six months.
The Federal Reserve and central banks of other countries have adopted a quantitative easing policy that helps countries to reduce the negative effects of inflation. Quantitative easing is used to stimulate the economy to grow when the monetary policy of that country fails. When governments control the money supply in a country, this move is said to be economically positive. The Federal government decided that, from 2009, it would delay dividend payments to companies and individuals because they would have to take time to ensure that dividends are paid to people and companies that deserve (Eisinger, 2012). This policy reduced fraud in the country; other countries such as Germany have adopted this policy. These moves by central banks show that the banks are motivated to shape the world financial system.
The Federal Reserve of US and the European Central Bank control the monetary policy of their countries; the two banks use different tools. The laws of the two banks affect the treasury of US; for example, the securities laws of the two banks have led to high US treasury debts.
References
Meaning J. (2012). The impact of federal reserve asset purchase programmes: another twist
BIS quarterly Review. Retrieved from http://www.bis.org/publ/qtrpdf/r_qt1203e.pdf
Eisinger J. (2012). Fed shrugged off warnings: let banks pay shareholders billions. Business ethics. Retrieved from http://business-ethics.com/2012/03/02/1601-fed-shrugged-off- warnings-let-banks-pay-shareholders-billions/
Langin C. (2011). The European central bank and the federal reserve system- a general comparison. Berlin: GRIN Verlag. Print
