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Fed, ECB, BoE, BoJ: who does what?

You can name the mandates and decision bodies of the Fed, the ECB, the Bank of England and the Bank of Japan, and explain why their goals differ.

Four big central banks

When the head of a large central bank speaks, currencies, bonds and shares around the world can move within seconds. Four of them matter most for global markets: the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan.

Their goals sound almost identical, and all four aim for 2% inflation. But the legal mandates behind them differ, and so do the committees that decide. Those differences explain many market reactions.

Mandates and committees

A central bank sets the cost of money for its currency. What it aims for is laid down in law or by government.

Federal Reserve (Fed). Congress assigned it the goals of maximum employment and stable prices, a dual mandate. Its inflation target is 2%, measured by the price index for personal consumption expenditures (PCE). Policy is set by the Federal Open Market Committee (FOMC): the seven Board governors, the president of the New York Fed and four of the other eleven Reserve Bank presidents on rotation. It holds eight scheduled meetings a year.
European Central Bank (ECB). Its primary objective under the EU treaties is price stability. It aims for 2% inflation over the medium term, and since its 2021 strategy review the target is explicitly symmetric. The Governing Council, made up of the six Executive Board members and the governors of the euro area central banks, takes monetary policy decisions every six weeks.

Bank of England (BoE). The UK government sets it a 2% inflation target for consumer prices. A nine-member Monetary Policy Committee, five from the Bank and four external members appointed by the Chancellor, decides how to reach it.
Bank of Japan (BoJ). It set a price stability target of 2% for consumer prices in January 2013. Its Policy Board decides at regular monetary policy meetings.

When goals conflict

Most of the time, the goals point the same way. They can diverge.

Imagine inflation at 3.5%, above target, while unemployment starts to rise. A central bank focused only on prices would keep rates high. The Fed, with its dual mandate, has to weigh both goals and may move sooner to support jobs. The ECB, with price stability as its primary objective, would put prices first.

Markets try to read which goal a bank is focusing on. A change in wording in a statement, such as more attention to "the labor market", can move currencies and bond yields before any rate changes.

Mandates also explain different tools. The BoJ spent decades fighting inflation that was too low rather than too high, which is why its tools look different, a topic for the lesson on quantitative easing.

Common mistakes

Assuming all central banks want the same thing. The 2% targets are similar, the mandates are not.
Treating the target as a promise. In 2022, inflation rose far above 2% in the US, the euro area and the UK.
Watching only the chair. Committees vote, and dissents or rotating voters can signal changes.
Ignoring time zones and calendars. Each bank decides on its own schedule, published in advance.

The takeaway

The Fed aims for jobs and stable prices, the ECB, BoE and BoJ mainly for price stability. All four target 2% inflation and decide at scheduled meetings.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the central bank that has two equal goals, jobs and prices.

Tap the chart.

Congress gave the Fed the goals of maximum employment and stable prices, often called the dual mandate.
2Who sets the Bank of England's 2% inflation target?

The government sets the target, and the Bank's Monetary Policy Committee decides how to reach it.
3How many people vote on the FOMC?

All 12 Reserve Bank presidents take part in the discussion, but only five vote in a given year.
4What does a symmetric 2% target mean at the ECB?

The ECB adopted the symmetric formulation in its 2021 strategy review.

of 4 correct.

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