Difference between the European Central Bank and the Federal Reserve (ECB-FED)

The European Central Bank (ECB) and the Federal Reserve (FED) are the two largest central banks in the world. The functions of both banks are similar. However, their differences are gigantic, starting with the monetary policy objectives of each bank.

Difference between the European Central Bank and the Federal Reserve (ECB-FED)

The policies carried out by the ECB and the Fed affect nearly 700 million people in the most developed nations on the planet and their currencies are a world reference.

We are going to carry out an analysis of the differences between both central banks and their monetary policy, we are going to start by analyzing the structure of their organization as a monetary institution, followed by the monetary policy objectives, the strategy used and finally, the instrumentation carried out. carried out to control those objectives for which it has been designed. For this, several comparative tables have been prepared so that an exhaustive analysis can be carried out, in this way the reader can better understand all the information presented.

The European Central Bank and Federal Reserve

The European Central Bank is the central bank of the single European currency, the euro. On January 1, 1999, a new era began with the adoption of the single currency. Since its inception, it has become the second largest currency in economic terms after the United States of America dollar. The main function of the ECB is to maintain the purchasing power of the single currency and thus price stability in the euro zone. The ECB controls the money supply and the evolution of prices.

The Federal Reserve has been the central bank of the United States since the year it was founded by Congress in 1913, with the aim of providing the country with a more secure, flexible and stable monetary and financial system. Today this purpose is carried out through four areas (BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM: « Purposes and functions «):

  1. Conduct the country’s monetary policy influencing monetary and credit conditions in the economy with the objective of achieving sustainable economic growth with full employment, price stability and a moderate long-term interest rate.
  2. Supervise and regulate banking institutions to guarantee the safety and soundness of the banking system and the financial system, and to protect the credit rights of consumers.
  3. Maintain the stability of the financial system and contain the systemic risk that may appear in the financial markets.
  4. Provide financial services to the US government, depository institutions, and foreign official institutions, playing an important role in the nation’s payment system.

As a monetary institution, both central banks are structured in a similar way, although the instrumentation is decentralized in the National Central Banks (BCNs) in the case of the ECB and centralized in the Board of Governors and the Federal Open Market Committee (FOMC) in the case of the Fed.

The most noticeable difference regarding the comparison of both monetary policies resides in the objectives that each central bank pursues and that really define its way of acting. The European Central Bank has only one objective, and that is price stability, setting it quantitatively at 2 percent. It is a primary objective over the shared objectives of the Federal Reserve System. Closely linked to the above, the monetary policy strategy also has clear differences. While the ECB has it clearly defined by defining the ultimate objective in quantitative terms and based on two pillars, the Federal Reserve relies on a large number of indicators that define its strategy, visibly not delimited.