Comparison Between The Federal Reserve (FED) And The Bank Of England

Introduction A financial crisis can be defined as a major disruption in financial markets, represented by firm failures and sudden declines in prices of assets. In the beginning of 2007, defaults in the subprime mortgage market shocked financial markets around the world. This has lead to the worst financial crisis since the Great Depression. This financial crisis also affected major central banks around the world, which were forced to act quickly and adopt new measures, so as to avoid a collapse in their economies. Therefore, the three main central banks: the European Central Bank (ECB), the Federal Reserve (FED), and the Bank of England (BoE), adopted several measures in recent times as a response to the financial crisis.
i. Describe the

The FED in the US has been buying Treasury bonds and bills, and agency mortgage backed securities. However, Congress approval is needed in order to be able to buy private debt. Furthermore, the BoE has been buying fixed-interest loan securities issued by the UK government, but no private debt. The third option, which is probably the most effective, is to try and lower real interest rates, by raising expectations of inflation, and allow inflation to be above the normal target of the central bank. Despite this being a drastic solution, many economists had recommended Japan to do this about ten years ago. At the present, it is evident that the policy of most central banks is set to maintain a medium-term target for inflation, but at the same time, in the short-term they can also respond to changes in output potential. This can be done by temporarily moving away from the medium-term target for inflation. For central banks to do this there are five policy options. The first policy option is to set conditional policy rules, as was proposed at the FED Federal Open Market Committee (FOMC) in 2012. This is done so as to commit to a longer period of policy than what is considered probable by markets. An example of this is the decision FED took to keep policy rates low till the end of

Since banks are very important for the financing of the Euro Area economy and for the implementation of monetary policy in the ECB, this situation was worrying due to a high risk of having the central bank not being able to guide monetary policies. Like other central banks, the ECB quickly reduced interest rates. However, the main element of the ECB’s response to remain effective was that of non-standard policy measures. The aim of the ECB was retain price stability, stabilise the financial situation, and limit the risks on the