The Federal Reserve and European Central Bank: institutional mandates and objectives

U.S. Federal Reserve and European Monetary System

US and European Money Systems

US Federal Reserve

With the passage of the Federal Reserve Act, the Congress of the United States of America established the primary monetary objectives of the institution. The primary goals of The Act are as follows: 1) To maximize employment; 2) to foster stable prices; and 3) to establish long-term interest rates. The dual mandate, as it is often called, of the Federal Reserve (aka "The Fed") encompasses the first two of these objectives. The duties of the Federal Reserve have increased over the past several decades and now encompass the following:

Implementing the monetary policy of the U.S.;

Regulating and supervising banking institutions;

Ensuring a stable national financial system;

Providing financial services as a central bank to the U.S. government, domestic depository; institutions, and foreign official institutions;

Researches and publishes about the national economy;

To address the problem of banking panics, in part by supervising and regulating banking institutions;

To strike a balance between private interests of banks and the centralized responsibility of government;

To protect the credit rights of consumers;

To manage the nation's money supply through monetary policy to achieve the key objectives that sometimes conflicted;

To work to prevention inflation or deflation;

To moderate long-term interest rates

To maintain the stability of the financial system and contain systemic risk in financial markets.

To play a major role in operating the nation's payments system

To facilitate the exchange of payments among regions;

To respond to local liquidity needs;

To strengthen U.S. standing in the world economy.

Historically, the main reason that the Federal Reserve System was established was to address the banking panics that were associated with the depression and economic crises. Several other important policy solutions were sought by the Federal Reserve System, including the need to furnish a currency that was more elastic, to re-discount commercial paper, and to ensure that the supervision of domestic banks was more robust than in the past. The years prior to the founding of the Federal Reserve System in the United States saw a number of significant financial crises. Notably, the very severe financial crisis of 1907 was the catalyst for the development of the Federal Reserve System.

Exchange Rates

The General Council is a European Union agency that deals with the transitional issues that stem from the adoption of the euro. One of the primary considerations of the General Council is fixing the exchange rates of currencies as they are being replaced by the euro. Determining the exchange rates was a duty of the former EMI. The European Exchange Rate Mechanism is based on fixed currency exchange rate margins. However, within the exchange rates, the margins are variable -- this is known as a semi-pegged system. Prior to the euro, the European Currency Unit (ECU) was used to determine a weighted average of the currencies of participating members. The bilateral rates were calculated from the central rates that were expressed as ECUs, and the fluctuations in the currency were kept to within a 2.25% margin on each side of the bilateral rates.