FNCE 3020 Financial Markets and Institutions

1
FNCE 3020Financial Marketsand Institutions

• Lecture 7
• Topics
• Central Banking and the Conduct of Monetary
  Policy
• Impact of Central Bank Actions on Financial
  Markets

2
What are These Central Banks and Who are These
Central Bankers?
3
Why Study Central Banking?

• Answer Central bank actions have significant
  impacts on financial markets and specifically on
• (1) interest rates (the cost of borrowing and the
  return on investing).
• (2) financial asset prices (stocks, bonds,
  foreign exchange)
• Thus we need to know something about central
  banks
• How do central banks operate in financial
  markets?
• How can we monitor the potential for changes in
  central bank actions?
• Understanding these issues will add to our
  understanding of (1) and (2) above.

4
Definitions of a Central Bank

• Text book definition
• The government agency that overseas the banking
  system and is responsible for the amount of money
  and credit supplied in the economy.
• Other definitions
• The entity responsible for the monetary policy
  of its country
• The major regulatory bank in a country.
• The government agency whose responsibilities
  include
• the issuance of currency,
• the administration of monetary policy, (e.g.,
  open market operations, the discount rate), and
• engaging in transactions designed to facilitate
  healthy business interactions. (i.e., a sound
  financial system).

5
Who Runs the Central Bank?

• In most countries -- especially in the developing
  world -- the central bank is state owned and,
  thus, has a minimal degree of autonomy from the
  government.
• This situation, unfortunately, allows for the
  possibility of government interference in
  monetary policy.
• In the major countries of the world, however,
  central banks generally operate independent of
  their respective governments.
• This is designed to prevent political
  interference.
• In reality, however, the degree of independence
  varies even among these major countries.
• For example, some governments (e.g., the U.K.,
  Australia, and Canada) are involved in setting
  inflation targets for their central bank. The
  ECBs target is set in its mandate.
• Switzerland is the only major central bank who
  sets its own inflation rate target without
  Government involvement.

6
Major Central Banks Independence

• Central Bank Date of Independence
• Federal Reserve 1913
• Bank of England 1997
• Bank of Japan 1998
• European Central Bank 1999
• Recognized date of separation from government
  influence.
• With the passage of the Federal Reserve Act.
• ECB independence granted in its original
  charter.

7
U.S. Central Bank The Fed

• Except for two failed attempts (1791 and 1816),
  the U.S. operated without an effective central
  bank up until the early 20th century.
• During this period, there were frequent economic
  recessions and financial crises in the U.S. with
  the Bank Panic of 1907 finally convincing the
  government that a central bank was necessary.
• On December 23, 1913, Congress passed and
  President Woodrow Wilson signed into law The
  Federal Reserve Act, establishing a central bank
  for the United States.
• The Act also called the Glass-Owen Act.
• The 1913 Act was to provide for establishment of
  Federal reserve banks, to furnish an elastic
  currency, to afford means of rediscounting
  commercial paper, to establish a more effective
  supervision of banking in the United States, and
  for other purposes.
• Note There are no macro economic goals in the
  1913 Act.

8
Early Post Fed Years U.S. Economic Performance
9
Changing Goals of the Federal Reserve

• In response to the unemployment crisis of the
  Great Depression, the U.S. Congress, in February
  1946, passed the Full Employment Act
• The Congress hereby declares that it is the
  continuing policy and responsibility of the
  Federal Government to promote maximum
  employment, production and purchasing power.
• These become the goals of government policy (not
  just the central bank).

10
Economic Performance 1970s -80s

• In the 1970s, global inflation becomes the major
  economic issue.
• There were two distinct peaks 1973/74 and
  1980/81.
• The inflation of this period is attributed to
  supply shocks to the global economy.
• Especially oil.
• As a result, central banks turn their attention
  to inflation and to possible inflation targets as
  a goal.

11
Changing Goals of the Federal Reserve

• How does the Fed respond to this environment?
• In 1977, additional mandates for the Federal
  Reserve are introduced with amendments to the
  Federal Reserve
• The 1977 amendments required the Board of
  Governors and the FOMC to "maintain the growth of
  monetary and credit aggregates commensurate with
  the economy's long-run potential to increase
  production, so as to promote effectively the
  goals of maximum employment, stable prices, and
  moderate long-term interest rates."
• But a specific inflation target is not identified.

12
Illustrating Central Bank Actions

• Monetary Policy Tools (Policy Instruments)
• (1) Open market operations
• (2) Discount window (borrowing) facilities
• (3) Reserve requirement adjustments
• Operational Targets (Targets of Policy Actions)
• Monetary aggregates (money supply)
• Financial market variables (interest rates)
• Macroeconomic Target (Ultimate Goals of Policy)
• Inflation
• Economic growth
• Employment
• Exchange rate

13
Monetary Policy Tools (Instruments)

• How does a central bank (e.g., the Federal
  Reserve achieve operational targets and
  eventually its macro-economic goals?
• Answer Through three main instruments
• (1) Open market operations
• Purchases and sales of U.S. Treasury and federal
  agency by the open market committee
• While, the Federal Reserve's operational
  objective for open market operations has varied
  over the years, by 1995 the Fed began to
  explicitly state a target level for the federal
  funds rate.
• For specific targets since 1995, see
  http//www.federalreserve.gov/fomc/fundsrate.htm

14
Fed Funds Target, June 2006 - Present

• Date Basis Point Increase or Decrease New Level
  ()
• 2008 Oct 29 -50 1.00
• Oct 8 -50 1.50
• Apr 30 -25 2.00
• Mar 18 -75 2.25
• Jan 30 -50 3.00
• Jan 22 -75 3.50
• 2007
• Dec 11 -25 4.25
• Oct 31 -25 4.50
• Sept 18 -50 4.75
• 2006 June 29 25 5.25

15
The Discount Rate (Current Rate)

• (2) The discount rate is the interest rate
  charged to commercial banks and other depository
  institutions on loans they receive from their
  regional Federal Reserve Bank's lending facility,
  commonly referred to as the discount window.
• Federal Reserve Banks offer three discount window
  programs to depository institutions
• (1) primary credit, i.e., overnight, (1.25)
• (2) secondary credit (to meet severe short term
  financial difficulties (1.75), and
• (3) seasonal credit, i.e., to smaller
  institutions in agricultural or seasonal resort
  areas (2.0)
• Each discount program has its own interest rate
  and all loans must be fully secured (usually with
  Treasury obligations).
• The term discount rate is normally applied to
  the rate on primary credit loans.
• For information on discount rates see
  http//www.frbdiscountwindow.org/index.cfm

16
Relationship of Discount Rate to Fed Funds Rate

• Historically, the discount rate was set below the
  federal funds rate.
• However, to discourage banks from borrowing at
  the discount window and lending it out at a
  profit in the fed funds market, the Fed required
  a bank to prove it had exhausted all other
  sources of funds first.
• In 2003, the Fed introduced a new arrangement by
  which the discount rate would be set above the
  fed funds rate.

17
Reserve Requirements

• (3) Reserve requirements are the amount of funds
  that a depository institution must hold in
  reserve against specified deposit liabilities.
• Deposit liabilities consist of transaction
  accounts (e.g., demand deposits, NOW accounts,
  etc), time deposits, and eurocurrency
  liabilities.
• Under the Monetary Control Act of 1980, the Fed
  can vary reserve requirement up to 14 on
  transaction accounts and up to 9 on other
  deposits.
• Since December 27, 1990, non-personal time
  deposits and eurocurrency liabilities have had a
  reserve requirement of zero.
• Savings accounts do not have reserve
  requirements.
• Currently, the reserve requirement on transaction
  accounts varies from 3 to 10 (depending upon
  the amount).
• Depository institutions must hold reserves in the
  form of vault cash or deposits with Federal
  Reserve Banks.

18
Monetary Control Act (MCA) of 1980

• Before the passage of the MCA in 1980, only
  commercial banks that were members of the Federal
  Reserve System had to meet the Fed's reserve
  requirements.
• State-chartered commercial banks that were not
  Federal Reserve members had to meet their state's
  reserve requirements, which typically were lower.
• As a result, many commercial banks dropped their
  Federal Reserve membership in favor of state
  charters.
• And, Federal Reserve member bank transaction
  deposits fell from nearly 85 of total U.S.
  transaction deposits in the late 1950s to 65 two
  decades later.
• The MCA resolved this problem by authorizing the
  Fed to set reserve requirements for all
  depository institutions, regardless of Fed
  membership status.

19
Reserve Requirements, January 2008
20
Reserve Requirements as a Monetary Policy Tool

• Since 1980, there have been only a handful of
  policy-related reserve requirement changes.
• For example, in December 1990, the Fed cut the
  requirement on non-personal time deposits and on
  net Eurocurrency liabilities from 3 to 0.
• The Fed noted that the cut would reduce banks'
  costs, "providing added incentive to lend to
  creditworthy borrowers.
• In April 1992, it cut the requirement on
  transaction deposits from 12 to 10.
• The Fed noted that its April 1992 cut in reserve
  requirements, would put banks "in a better
  position to extend credit."

21
Historical Use of Fed Policy Instruments

• 1913 Act Major policy instrument was the
  discount facility and the discount rate.
• Federal Reserve Act of 1913 had no provision for
  changes in reserve requirements and open market
  operations as a policy tool were not yet
  discovered.
• When discount loans (a source of income for the
  Fed) fell in 1920, the fed purchased seasoned
  securities for income)
• By the late 1920s Fed had discovered that there
  open market operations had an important impact on
  bank reserves.
• Thus open market operations becomes the major Fed
  tool.

22
What Operational Variable Should a Central
Bank Target?

• One of the issues which any central bank faces is
  what operational target should they use when
  adjusting monetary policy tools.
• From a practical standpoint, the choice is
  between
• A monetary aggregate such as the money supply or
• A financial market variable such as an interest
  rate or an exchange rate

23
Historical Use of Operational Targets by the
Federal Reserve

• In the years immediately after WW II, the Fed
  agreed to peg interest rates at very low levels
  (3/8 on Treasury bills and 2 ½ on Treasury
  bonds) to hold down the Treasurys war financing
  costs (see next slide)
• In 1951, an agreement (called the The Accord)
  was reached between the Treasury and the Fed
  whereby the Fed would no longer peg interest
  rates.
• In the 1950 and 1960s, the Federal Reserve
  shifted its target to money market conditions,
  and specifically short term interest rates.
• By the 1970s, under increasing criticism from
  monetarists that central banks were unable
  control inflationary pressures, the shift was to
  the targeting of monetary aggregates,
  specifically various money supply measures (M1,
  M2, etc).

24
Short Term Interest Rates After WWII
25
Recent Record of Central Bank Operational
Targeting

• In the 1970s, most major central banks had
  dropped interest rate targets and adopted some
  form of monetary aggregate targeting
• Bank of England in 1973
• Bundesbank in 1975
• Bank of Japan in 1978
• Federal Reserve in October 1979.
• However, in the 1980s, central bank concern about
  the wide swings in interest rates, combined with
  their apparent inability to meet their monetary
  aggregate targets, resulted in the de-emphasis
  this monetary aggregate approach.
• There was also growing research suggesting that
  the predictable relationship between money
  supply aggregates and economic growth had broken
  down (see next slide)
• The monetary policy target shift, therefore, was
  to eventually focus back on an interest rate
  target.

26
Money Supply and Real GDP
27
Current Central Bank Operational Targeting

• In July 1993, the Fed announced it was no longer
  going to use any monetary targets.
• By the early 1990s, most major central banks had
  abandoned monetary targets in favor of some short
  term interest rate as their operational target.
• Fed Reserve The fed funds rate (rate for
  reserves in the interbank market).
• Bank of England Official bank rate
• European Central Bank Main refinancing rate
• Bank of Japan Uncollateralized overnight call
  rate

28
Central Bank Operational Target Interest Rates,
November 10, 2008 and (October 22, 2007)

• Federal Reserve
• Federal Funds Rate 1.00 (4.75)
• Bank of England
• Official bank rate 3.00 (5.75)
• European Central Bank
• Main refinancing rate 3.25 (4.00)
• Bank of Japan
• Uncollateralized overnight call rate 0.5 (0.5)

29
Recent Foreign Central Bank Interest Rate Changes
30
Does the Fed Funds Target Mean Anything Today?
31
The Federal Open Market Committee

• Undoubtedly the most closely watch group within
  the Federal Reserve is the Federal Open Market
  Committee.
• There are 12 members on the FOMC
• All seven members of the Board of Governors plus
  the president of the Federal Reserve Bank of New
  York and four other presidents among the
  remaining 11 Federal Reserve District Banks (see
  Appendix 1 for the Fed structure).
• The chairman of the Board of Governors is the
  chair of the FOMC.
• The FOMC has scheduled meetings 8 times a year
  (about every 6 weeks) although emergency
  meetings can be called anytime, and at these
  meetings
• The FOMC makes decisions regarding the level of
  the federal funds rate.

32
How Often Do Central Banks Meet?
33
Policy Statements from the FOMC

• At the conclusion of each FOMC meeting, the FOMC
  will issue a press release which highlights the
  meeting.
• This statement will begin by stating what, if
  anything, the FOMC has decided to do with the
  federal funds rate.
• This statement also reviews the current economic
  environment.
• This statement also provides opinions as to where
  the FOMC sees the economy moving in the near term
  as well as noting any potential problem area
  (e.g., inflation, or specific sectors).
• The statement will end with a review (breakdown)
  of the votes.
• As such, readers look for clues as the future
  outlook for monetary policy.
• Will policy tighten, eased up, or stayed the
  course?
• After three weeks, the FOMC will release the full
  minutes of its meeting.
• For a calendar of future meetings and past press
  releases and full minutes see
• http//www.federalreserve.gov/fomc/calendars

34
FOMC Press Release Jan 30, 2008

• The Federal Open Market Committee decided today
  to lower its target for the federal funds rate 50
  basis points to 3 percent.
• Financial markets remain under considerable
  stress, and credit has tightened further for some
  businesses and households.  Moreover, recent
  information indicates a deepening of the housing
  contraction as well as some softening in labor
  markets.
• The Committee expects inflation to moderate in
  coming quarters, but it will be necessary to
  continue to monitor inflation developments
  carefully.
• Todays policy action, combined with those taken
  earlier, should help to promote moderate growth
  over time and to mitigate the risks to economic
  activity.  However, downside risks to growth
  remain.  The Committee will continue to assess
  the effects of financial and other developments
  on economic prospects and will act in a timely
  manner as needed to address those risks.
• Voting for the FOMC monetary policy action were
  Ben S. Bernanke, Chairman Timothy F. Geithner,
  Vice Chairman Donald L. Kohn Randall S.
  Kroszner Frederic S. Mishkin Sandra Pianalto
  Charles I. Plosser Gary H. Stern and Kevin M.
  Warsh.  Voting against was Richard W. Fisher, who
  preferred no change in the target for the federal
  funds rate at this meeting.
• In a related action, the Board of Governors
  unanimously approved a 50-basis-point decrease in
  the discount rate to 3-1/2 percent.  In taking
  this action, the Board approved the requests
  submitted by the Boards of Directors of the
  Federal Reserve Banks of Boston, New York,
  Philadelphia, Cleveland, Atlanta, Chicago, St.
  Louis, Kansas City, and San Francisco.

35
Bank of Japan Press Releases
36
ECB and Bank of England Press Releases

• ECB http//www.ecb.int/press/html/index.en.html
• ECB Follow-up (With Q and A) http//www.ecb.int/pr
  ess/pressconf/2008/html/index.en.html
• Bank of England http//www.bankofengland.co.uk/pu
  blications/news/2008/index.htm

37
Importance of the Federal Funds Rate

• The federal funds rate is the interest rate at
  which depository institutions lend reserve
  balances through the Federal Reserve system to
  other depository institutions
• These reserve loans are essentially on an
  overnight basis.
• Why is the federal funds rate important?
• Because changes in the federal funds rate trigger
  a chain of events that affect
• The amount of money and credit in the economy
  (via lending activities)
• Other short-term (money market) interest rates,
• Long-term interest rates,
• Foreign exchange rates, and,
• Ultimately, a range of economic variables,
  including employment, output, and prices of goods
  and services.

38
Federal Funds Rate 1970 - Present
39
Impact of Fed Funds Rate on Business Loan
Interest Rates (Prime Rate)
40
Impact of Fed Funds Rate on Money Market Interest
Rate (CD Rate)
41
Impact of Fed Funds Rate on Long Term Corporate
Bond Rate (Aaa Rate)
42
Impact of Fed Funds Rate on Mortgage Lending
Rate (30-Year Rate)
43
Impact of Federal Funds Rate on Dollar
44
Interest Rate Spread and Exchange Rate British
Pound
45
Interest Rate Spread and Exchange Rate European
Euro
46
Appropriate Macroeconomic Target

• Monetary Policy Tool
• Open market operations
• Buying and selling Treasury securities
• Operational Target
• Monetary aggregates (money supply)
• Financial market variables (interest rates)
• Macroeconomic Target
• Inflation target
• Economic growth target
• Unemployment rate target
• Exchange rates target

47
Use of Macroeconomic Targets

• From a practical standpoint there are any number
  of macroeconomic variable a central bank might
  target. These include
• A unemployment rate
• A real GDP growth rate
• An exchange rate
• An inflation target
• The use of exchange rate targets was popular
  among some central banks in the late 1980s/early
  1990s.
• Bank of England adopted an exchange rate target
  in 1990.
• However, beginning with the Central Bank of New
  Zealand in March 1990, central banks have been
  adopting either explicit or implicit inflation
  rates for their macroeconomic target.
• Over the decade of the 1990s, a growing number of
  countries adopted explicit inflation targets (see
  next slide).

48
Explicit Targets 1990 and 1998
49
Adoption of Inflation Targets and Actual ( CPI
Data as of Feb 2008 , Oct 2008)

• Examples of central banks which have adopted
  explicit inflation targets
• New Zealand March 1990 (set at 0 to 2) (CPI
  3.2, 5.1)
• Canada February 1991 (set at 1 to 3) (CPI
  2.2, 1.7)
• United Kingdom October 1992 (set at 2) (CPI
  2.2, 5.2)
• Australia 1993 (set a 2 to 3) (CPI 3.0, 5.0)
• Euro-zone Jan 1999 (set below, but close to, 2)
  (CPI 3.2, 3.6)
• Brazil June 1999 (set at 8) (4.56, 6.41)
• South Africa 2002 (set a 3 to 6) (CPIX 9.3,
  13.0)
• Other central banks which have implicit inflation
  targets
• Japan The Bank of Japan's mission is to pursue
  price stability, in other words to maintain an
  economic environment in which there is neither
  inflation nor deflation.
• United States shall maintain long run growth of
  the monetary and credit aggregates so as to
  promote stable prices

50
Inflation Targeting Statements

• The primary objective of the ECBs monetary
  policy is to maintain price stability. The ECB
  aims at inflation rates of below, but close to,
  2 over the medium term.
• The Bank of Englands monetary policy objective
  is to deliver price stabilitydefined by the
  Governments inflation target of 2.
• Bank of Korea has adopted inflation targeting
  and its current inflation target has been set for
  the period 2004-2006 as a range of 2.5-3.5.
• The Central Bank of Iceland's main objective is
  price stability, defined as a 12-month rise in
  the CPI (Consumer Price Index) of 2½.
• The Bank of Switzerlands monetary policy aims
  at ensuring price stability in the medium and
  long term price stability is defined as a rise
  in the national consumer price index (CPI) of
  less than 2 per annum.

51
Inflation Targeting in New Zealand

• Note GST refers to Goods and Services Tax
• New Zealand had informally targeted inflation
  at 0 to 2 beginning in 1988 although in 1990 it
  was formally introduced into law with the New
  Zealand Act of 1989.

52
Inflation Targeting Impact on Interest Rates The
New Zealand Example
53
Should Central Banks be Independent?

• While the major countries of the world have
  granted their central banks independence, many
  countries have not (especially developing
  countries).
• Over the years, there has been growing debate as
  to the most efficient and effective arrangement.
• Case for Central Bank Independence
• Independent Central Banks are more likely to have
  longer run objectives while politicians may have
  shorter term objectives.
• Independence avoids a political business cycle.
• Empirical work suggests that countries with the
  most independent central banks do the best job of
  controlling inflation and achieving economic
  growth (see next slides).
• Case against Central Bank Independence
• Central Bank may not be accountable
• Hinders coordination of monetary and fiscal
  policy

54
Central Bank Independence and Inflation, 1955-1988
55
Central Bank Independence and Inflation, 1973-1988
56
Central Bank Independence and Economic Growth,
1973-1988
57
But How Independent are Central Banks and what is
the Role of Governments?
58
Central Bank Transparency

• Transparency means that a central bank provides
  the general public and the markets with all
  relevant information in an open, clear and timely
  manner.
• Transparency reduces uncertainty about a central
  banks intention.
• Today, most central banks consider transparency
  as crucial to their success.
• Monetary policy is assumed to be more effective
  when the central bank provides the public with
  guidance on its objectives, activities and
  outlook.

59
Central Bank Transparency

• Many Central Bank web sites now in English.
• Many central bankers regularly talk to the
  public.
• Central Bank decisions and actions are published
  in a timely and open manner.
• Bank of England Monetary Policy Committee meets
  the first Thursday of every month. The decisions
  on interest rates are announced at 12 noon
  immediately following the meeting.
• http//www.bankofengland.co.uk/monetarypolicy/deci
  sions/decisions07.htm
• Governing Council of the ECB meets on the first
  Thursday of each month with the decision on the
  key ECB interest rates is issued at 1.45 p.m.
  C.E.T. At 2.30 p.m. C.E.T. , the President and
  the Vice-President of the ECB hold a press
  conference to discuss the decision.
• http//www.ecb.int/press/govcdec/mopo/2007/html/in
  dex.en.html
• Bank of Japan announce their interest rate
  decisions immediately following their meeting.
• http//www.boj.or.jp/en/theme/seisaku/kettei/index
  .htm

60
Measures of Central Bank Transparency
61
Links to Worlds Major Central Banks

• United States Ben Bernanke
• http//www.federalreserve.gov/
• European Union Jean-Claude Trichet
• http//www.ecb.int/
• Bank of England Mervyn King
• http//www.bankofengland.co.uk/
• Bank of Japan Toshihiko Fukui
• http//www.boj.or.jp/en/index.htm

62
Other Useful Web Sites

• Links to all the worlds Central Banks
• http//www.bis.org/cbanks.htm
• Federal Reserve statistical data
• http//www.federalreserve.gov/releases/
• Economic time series, U.S. and some foreign (also
  allowing for graphing of data)
• http//www.economagic.com/

63
Appendix 1 Structure of the Federal Reserve
64
Formal Structure of the Federal Reserve System

• The system (i.e., formal structure) as it exists
  now includes
• Twelve Federal Reserve Banks
• Member Banks, i.e., members of the Federal
  Reserve (around 3,600, out of about 7,500 banks)
• Seven individuals who are members of the Board of
  Governors (BOG) of the Federal Reserve System
  (including a Chairman).
• Twelve individual members of the Federal Open
  Market Committee (FOMC).
• Federal Advisory Council (12 bankers)
• Note The system, however, is dominated by the
  Board of Governors

65
Formal Structure of the Fed
66
The Twelve Federal Reserve Districts
67
Appendix 2 Other Major Central Banks

• The Bank of England, the Bank of Japan and the
  European Central Bank are discussed in the slides
  that follow

68
Bank of England

• Founded in 1694 initially to manage the U.K.
  Governments accounts and to borrow on behalf of
  the Government (usually to finance wars with
  France).
• Controlled by the Government until granted
  interest rate autonomy in 1997 by the Labor
  Party.
• Since May 1997 the Banks 9 member Monetary
  Policy Committee has had statutory responsibility
  for setting interest rates to meet the
  Government's stated inflation target.
• Each year the Chancellor of the Exchequer sets an
  inflation target for the country (currently 2).
  
• The MPC has to judge what interest rate is
  necessary to meet that inflation target.
• The Bank implements its interest rate decisions
  by setting the interest rate at which the Bank
  lends to commercial banks and other financial
  institutions in the U.K.

69
Bank of Japan (Nippon Ginko)

• Founded in 1882.
• The Bank of Japan Law (1998) gave the Bank of
  Japan autonomy for monetary policy.
• Also stated that monetary control shall pursuit
  price stability.
• The 7 member Policy Board targets an overnight
  interest rate for uncollateralized call money
  (similar to U.S. federal funds).
• The Bank controls the call money rate on a daily
  basis through money market operations (similar to
  open market operations).
• Also uses an official discount rate at which it
  will make loans to banks.
• At the present time, the Bank of Japan does not
  have a specified inflation target.

70
European Central Bank (ECB)

• Founded in January 1999 by a treaty between the
  European Central Bank (ECB) and the European
  System of Central Banks (ESCB).
• Stated goal is to maintain price stability in the
  euro area (at inflation rates of below, but close
  to, 2 over the medium term).
• The 18 member Governing Council is the main
  decision making body of the ECB.
• Consist of 6 Executive Board Members (chosen by
  the 12 euro member governments) plus the 12
  governors of all the national central banks from
  the 12 euro area countries
• The Governing Council meets its inflation target
  by setting the interest rate at which banks
  borrow from the central bank (similar to U.S.
  federal funds rate).
• The key ECB rate is the interest rate on
  refinancing operations which provide the bulk
  of liquidity to the banking system.

71
Appendix 3 Previous FOMC Press Releases
72
FOMC Statement January 31, 2007

• The Federal Open Market Committee decided today
  to keep its target for the federal funds rate at
  5-1/4 percent.
• Recent indicators have suggested somewhat firmer
  economic growth, and some tentative signs of
  stabilization have appeared in the housing
  market. Overall, the economy seems likely to
  expand at a moderate pace over coming quarters.
• Readings on core inflation have improved modestly
  in recent months, and inflation pressures seem
  likely to moderate over time. However, the high
  level of resource utilization has the potential
  to sustain inflation pressures.
• The Committee judges that some inflation risks
  remain. The extent and timing of any additional
  firming that may be needed to address these risks
  will depend on the evolution of the outlook for
  both inflation and economic growth, as implied by
  incoming information.
• Voting for the FOMC monetary policy action were
  Ben S. Bernanke, Chairman Timothy F. Geithner,
  Vice Chairman Susan S. Bies Thomas M. Hoenig
  Donald L. Kohn Randall S. Kroszner Cathy E.
  Minehan Frederic S. Mishkin Michael H. Moskow
  William Poole and Kevin M. Warsh.

73
Summary of September 18, 2007 Meeting

• The Federal Open Market Committee decided today
  to lower its target for the federal funds rate 50
  basis points to 4-3/4 percent.
• Economic growth was moderate during the first
  half of the year, but the tightening of credit
  conditions has the potential to intensify the
  housing correction and to restrain economic
  growth more generally.  Todays action is
  intended to help forestall some of the adverse
  effects on the broader economy that might
  otherwise arise from the disruptions in financial
  markets and to promote moderate growth over
  time. 
• Readings on core inflation have improved modestly
  this year.  However, the Committee judges that
  some inflation risks remain, and it will continue
  to monitor inflation developments carefully. 
• Developments in financial markets since the
  Committees last regular meeting have increased
  the uncertainty surrounding the economic
  outlook.  The Committee will continue to assess
  the effects of these and other developments on
  economic prospects and will act as needed to
  foster price stability and sustainable economic
  growth.
• In a related action, the Board of Governors
  unanimously approved a 50-basis-point decrease in
  the discount rate to 5-1/4 percent. 
• Voting for the FOMC monetary policy action were
  Ben S. Bernanke, Chairman Timothy F. Geithner,
  Vice Chairman Charles L. Evans Thomas M.
  Hoenig Donald L. Kohn Randall S. Kroszner
  Frederic S. Mishkin William Poole Eric
  Rosengren and Kevin M. Warsh.  

74
Appendix 4 Previous Interest Rate Targets
75
Central Bank Operational Target Interest Rates,
October 22, 2007

• Federal Reserve
• Federal Funds Rate 4.75
• Bank of England
• Official bank rate 5.75
• European Central Bank
• Main refinancing rate 4.00
• Bank of Japan
• Uncollateralized overnight call rate 0.5