Introduction
The United States Central bank system is known as the Federal Reserve (Fed). President Woodrow Wilson established The Federal Reserve in 1913 by signing the Act into law to improve the country’s financial and monetary conditions (West, 2019). The primary duties of the Fed are to maintain financial stability, conduct national economic policy, provide banking services, and regulate and supervise banks. There are not many differences comparing the Fed with other global central banks. For example, central banks validate monetary policy, tightening and easing credit and money supply availability. As a result, the central bank’s goal is to maintain a country’s financial stability. For example, the amount of money reserve institutions must uphold about deposits is something the central banks set. (Liana-Antonela, 2018). This paper focuses on the role of the Federal Reserve in global central banking.
The Organization/ Structure of the Federal Reserve
It’s important to remember that the central bank has the last say on interest rate changes. Central banks can impact macroeconomic policy, which reduces inflation and employment as its end goal. The Fed is tasked with overseeing the country’s banking sector or, in part, protecting bank depositors and maintaining a healthy bank balance sheet. All but a few countries have currency boards or central banks. The most well-known central banks globally include the ECB, the BoE, the Bank of Japan, and the Fed.
Unlike most banks, the Fed mixes the representation from private sector banks with the government appointees hence semi-decentralized. In the United States, the Fed is run by a board of governors that the president appoints. The Senate has voted to accept the appointment. Located in Washington DC, the Board of Governors has seven members. They are elected for a 14-year term to ensure long-term stability and continuity. The staggered terms are intended to provide that the Board of Governors makes policy decisions based on their economic merits rather than political influence. However, they are isolated from the political pressure. Political the chairman and the deputy are appointed after every four years and may be reappointed if they see as incompetent. The responsibilities of the Board of Governors are to oversee the nation’s payment system, administer specific consumer protection regulations, and control over financial services industry. They manage the activities of the reserve banks. The Board approves the nomination of the president of the reserve banks of Governors. They also support some of the members of the reserve banks and their presidents.
The whole of the Fed System as a total comprises many different bodies. It consists of 12 Federal Reserve Banks overseen by the directors. These banks run the Fed’s operations and serve regions throughout the country. Except for three, each District has additional offices to assist depository institutions and the general public. The Reserve Banks’ job is to handle all of the Treasury’s financial transactions and support the Treasury in its cash management and investment activities. In their research efforts, Reserve Banks examine regional, national, and international economic issues. Reserve, the reserve bank president, attends FOMC meetings to benefit from research that provides a wide range of viewpoints on the economy.
The Board of directors of each Reserve Bank is in charge of monitoring the operations and management of the District bank. These directors represent the different interests of each bank, providing leadership in the local business and the community, and leadership. The BOD provides the Reserve Bank with a private-sector perspective. Other parts of the Fed include the member banks, other depository institutions, and the federal market committee. 8,039 Commercial banks make up 38% of the member banks in the United States.
On the other hand, about 17,000 other depositories provide banking services to the American people and the approximately 3,000 member banks. Depository institutions such as credit unions, loan and savings associations, and non-member commercial banks make up most. They are subject to Federal Reserve System laws (including reserve requirements) and can use System payments services while not legally a system member. FOMC is the Fed’s monetary policymaking body that makes the decisions. Economic growth and price stability are the primary goals of this agency. The FOMC is responsible for regulating the country’s money supply.
Similarities and Differences of the Fed with Other Central Banks
Central banks are financial institutions with exclusive authority over money and credit production for a nation or set of countries. Monetary policy and banking regulation are generally the responsibility of central banks in today’s modern economies. Therefore, unlike cryptocurrencies, banks are centralized. The Federal Reserve is semi-decentralized. The Federal Reserve has existed for over 100 years now. The United States has been the global engine for growth and innovation (Shapiro & Wilson, 2021, January). Since the funding of the Federal Reserve, America has come out as one of the most powerful nations in the nation. The Fed is the most powerful central bank that serves as the leading global monetary affairs. The existence of the Fed has influenced the formation of other central banks worldwide, including the ECB. The ECB was established in the year 1978. Therefore, its structure and characteristics are similar to those of the Fed.
Centralization and decentralization are the most critical features of the ECB and the Fed. It is only by incorporating and including regional viewpoints into monetary policy that it is possible to reflect the economic demands of the countries properly. The Board of governors of the ECB and the fed have similar roles. The Board of governors based in Washington has seven members that function identical to the executive board members based in Frankfurt (Walerych & Wesołowski, 2021). When making monetary policy in the U.S., the Fed’s governors oversee the presidents of each of the 12 district banks. The ECB’s governing council, which includes the directors of the NCBs and the Executive Board, makes monetary policy decisions across Europe. In both circumstances, a diverse range of perspectives must be represented on the committee’s Board.
Nonetheless, the Fed is relatively more centralized. The governing council makes the decision-making body in the ECB. The executive Board has fewer votes than the NCB governors (Liana-Antonela, 2018). In the case of the Fed, by contrast, the Board retains the majority of votes on the FOMC. The decision-making powers are on the FOMC matters.
Another critical difference is that the U.S. Reserve Banks do not belong to any state, and each one represents a region that includes many conditions. As a result, it is more likely that Reserve Banks will serve the interests of all Americans, rather than just the interests of one particular state, as in the Eurosystem, where the authority of each NCB coincides with the borders of a single country. In the case of the Eurosystem, this limitation to amalgamation consider a more fundamental rule in the organization of the EU and the euro region. In contrast to the United States, the European Union is still a union of independent states without a powerful joint government. The legal wording of their mandates is perhaps the most notable difference between the ECB and the Federal Reserve. The ECB’s mandate is focused on one aim, but the Federal Reserve’s charter lists numerous purposes and does not provide exact information on their relative importance. The Federal Reserve faces difficulties interpreting its mandate because of a lack of clarity.
The similarities between the interpretations of the mandate of both banks, which have been operating since 1912, are noteworthy. However, the more recent developments suggest that the lack of clarity comes at a cost. As a part of the Fed’s response to the crisis, they provided a numerical definition of price stability and improvements in its communication. Both Fed and the ECB belong to the areas with the leading economy. Besides, they both have the largest GDP in the world. The dependence of both banks is dependent on economic and political independence. The ECB is more dependent than the Fed because the members of the Fed are appointed by the president and afterwards authorized by the Senate. However, the European Parliament has no power to make decisions for the ECB. The Fed lacks political independence since the state controls the exchange rates. On the other hand, the exchange rate in the ECB is not a national policy, and no government can determine it.
Conclusion
The legal wording of their mandates is perhaps the most notable difference between the ECB and the Federal Reserve. The ECB’s mandate is focused on one aim, but the Federal Reserve’s charter lists numerous purposes and does not provide exact information on their relative importance. The Federal Reserve faces difficulties interpreting its mandate because of a lack of clarity. The ESCB, which includes the NCBs, has its principal purpose of maintaining price stability (Derbali et al., 2020). When it comes to the Federal Reserve, though, it has a “dual mandate” that places equal weight on ensuring that the economy is growing and creating jobs. The Fed should advance the objective of maximum employment, pricing stability, and reasonable long-term interest rates successfully.
References
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Liana-Antonela, B. M. (2018). A Comparative Analysis of FED and ECB Reactions to the Global Financial Crisis. Ovidius University Annals, Economic Sciences Series, 18(1), 7-11. Retrieved from: https://stec.univ-ovidius.ro/html/anale/RO/wp-content/uploads/2018/08/2.pdf
Shapiro, A. H., & Wilson, D. (2021, January). Taking the fed at its word: A new approach to estimating central bank objectives using text analysis. Federal Reserve Bank of San Francisco. Retrieved from: https://www.frbsf.org/economic-research/publications/working-papers/2019/02/?utm_source=mailchimp&utm_medium=email&utm_campaign=working-papers
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West, R. C. (2019). Banking reform and the Federal Reserve, 1863-1923. In Banking Reform and the Federal Reserve, 1863-1923. Cornell University Press. Retrieved from: https://www.degruyter.com/document/doi/10.7591/9781501743849/html
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