Swiss and American central banks: same objective, different trajectories
Despite being in office for three months, US President Joe Biden has yet to nominate anyone for the vacant seat on the US Federal Reserve’s governing body. It would be unthinkable in Switzerland.
This content was published on April 30, 2021 – 09:00 AM
The Fed’s monetary policy committee has been understaffed for more than three years. Biden is attract criticismExternal link for his inability to rectify that.
A multiannual vacancy on the board of directors of the Swiss National Bank (SNB) is unthinkable – because it is organized in a completely different way.
What are the main differences between Swiss and American central banks?
The SNB is headed by a board of directors made up of three people appointed by its supervisory body, the Bank Council. This body includes representatives from business, science and politics. While in the United States, Parliament has a say in the appointment of governors, in Switzerland it is the Federal Council (government ministers) that either confirms or rejects proposed SNB board members. The SNB’s management structure is simpler.
At first glance, Swiss politics seem to have little influence on the SNB. In comparison, the governance structure of the US Federal Reserve is much more complicated and closely linked to the political process.. The Federal Open Markets Committee (FOMC) determines the direction of monetary policy. The FOMC includes seven Federal Reserve governors and 12 heads of regional reserve banks, who sit at the table when the Fed discusses monetary policy.
However, only five of the 12 regional presidents can vote. Voting rights rotate annually. The Federal Reserve of New York alone has a permanent vote because it is responsible for the implementation of monetary policy.
Elections for members of the Fed’s Board of Governors are highly politicized. They are appointed by the US president and confirmed by the Senate, where candidates sometimes fail to find a majority.
However, Swiss politicians can influence the SNB as well, as the Federal Council chooses which of the three members of the central bank‘s board it wishes to chair. This gives the government some influence over monetary policy.
In reality, the president has no more say in setting monetary policy within the three-member group. But if the other two board members work together against the president, it runs the risk of the president resigning. A natural aversion to taking this risk means that the Chair can significantly shape the direction of the SNB’s monetary policy over a long period. This makes the SNB predictable, but also presents a theoretical risk of blockage.
The US Federal Reserve is less exposed to this type of risk. The larger FOMC leads to a greater diversity of opinions. Even Fed Chairman Alan Greenspan, who went down in history as the “ maestro, ” sometimes had to bow to the majority opinion of the FOMC during his tenure from 1987 to 2006.
But such an important decision-making body also has its drawbacks. In Switzerland, it is clear who is responsible for monetary policy: the chairman of the SNB (currently Thomas Jordan). In contrast, FOMC members can hide behind the majority decision.
The roles are reversed when it comes to government in the respective countries. In the United States, the president has sole responsibility for government decisions. In Switzerland, the Federal Council operates with a wide range of opinions and a shared responsibility. If the SNB were organized like the US Federal Reserve, Jordan would have to convince a diverse decision-making body of its views. Just like the Swiss federal advisers (government ministers) must do today.
Author Fabio CanetgExternal link holds a doctorate in monetary policy from the University of Bern and the Toulouse School of Economics. He is a lecturer at the University of Neuchâtel. As a freelance journalist, he writes for SWI swissinfo.ch and The Republik. He also hosts the monetary policy podcast.GeldcastExternal link“.