Monetary Policy in the EU and the US

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.

European Monetary System

The fundamental objective of the European Monetary System is to maintain price stability within the Eurozone. This overarching goal is achieved through the accomplishment of various tasks, such as defining and implementing the monetary policy for the Eurozone, conducting foreign exchange operations, and taking care of the foreign reserves of the European System of Central Banks and, operating the financial market infrastructure. The financial market structure will include a technical platform that will accomplish the settlement of securities in Europe. In addition, the ECB has the exclusive right to authorize the member states to issue euro banknotes and to the exclusive right to issue coins.

The European Central Bank was the de facto successor of the European Monetary Institute (EMI). As the European Union transitioned to adopt the euro and prepare for the creation of the ECB and the European System of Central Banks (ESCB), the EMI became the transition agency. The Treaty on European Union (TEU or Treaty of Maastricht) enabled the ECB to replace the EMI in 1998, but it was not until the euro was formally introduced to the member states in 1999 that the ECB exercised its full powers.

Exchange Rates