Can it find the economic sweet spot?
Federal Reserve policymakers are confronting multiple challenges as they seek to guide the economy on a path of sustainable expansion while maintaining stable prices. The U.S. central bank must strike an elusive balance on monetary policy that wards off any inflationary pressure without suppressing an economic growth rate that is historically subpar. The Fed must determine when and how to reduce a balance sheet that has been inflated by $3.7 trillion in asset purchases as it attempted to reduce long-term interest rates. And it must cope with these issues at a time when lawmakers are sharply questioning the bank’s independence and President Trump is about to reshape the leadership by appointing a new chair and several governors.
Among the key takeaways:
The Fed is edging its benchmark interest rate upward in small increments after holding it at near zero for seven years as the economy struggled to recover from the 2007-09 recession.
U.S. economic growth since the end of the recession has been stuck at around 2 percent annually, unlike in previous expansions when it averaged 3 to 4 percent.
The Fed gained significant new powers to regulate the financial industry under the 2010 Dodd-Frank Act, but the Trump administration and Congress may curtail some of this authority.
Resources for Further Study
Bernanke, Ben S., “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” W.W. Norton & Company, 2015. The former chair of the Federal Reserve provides his insider account of the 2008 financial crisis and the central bank’s actions to stabilize the banking system.
Bernanke, Ben S., “The Federal Reserve and the Financial Crisis,” Princeton University Press, 2013. Transcripts of lectures given by the former Fed chair in 2012 to students at George Washington University about the history of the Fed and the financial crisis.
Conti-Brown, Peter, “The Power and Independence of the Federal Reserve,” Princeton University Press, 2016. A financial historian and legal scholar examines the Fed’s influence over time, including how it has interacted with other government bodies.
Lowenstein, Roger, “America’s Bank: The Epic Struggle to Create the Federal Reserve,” Penguin Books, 2015. A financial journalist traces the founding of the Federal Reserve in 1913, with an in-depth look at the political and economic dynamics that contributed to its creation.
Mallaby, Sebastian, “The Man Who Knew: The Life and Times of Alan Greenspan,” Penguin Group USA, 2016. A journalist and senior fellow at the Council on Foreign Relations constructs a probing biography of the former Fed chair who oversaw the economy in the two decades leading up to the financial crisis.
Burns, Katy, “The Oxford Economist Running the Fed’s Interest-Rate Machine,” The Wall Street Journal, Nov. 23, 2015, http://tinyurl.com/
Davidson, Kate, “The Uneasy Politician: Janet Yellen Is Struggling to Fend Off the Fed’s Many Critics,” The Wall Street Journal, Feb. 1, 2017, http://tinyurl.com/
Pollock, Alex J., “It’s High Time to ‘Audit’ the Federal Reserve,” The Wall Street Journal, March 22, 2015, http://tinyurl.com/
Russonello, Giovanni, “How the Fed’s Interest Rate Increase Can Affect You,” The New York Times, Dec. 14, 2016, http://tinyurl.com/
Reports and Studies
“The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” Financial Crisis Inquiry Commission, 2010, http://tinyurl.com/
“Financial Turmoil Timeline,” Federal Reserve Bank of New York, http://tinyurl.com/
“The Road to Normal: New Directions in Monetary Policy,” Annual Report 2015, Federal Reserve Bank of St. Louis, http://tinyurl.com/
Binder, Sarah, and Mark Spindel, “Independence and accountability: Congress and the Fed in a polarized era,” The Brookings Institution, April 2016, http://tinyurl.com/
Bivens, Josh, and Connie M. Razza, “Mind the Gap: How the Federal Reserve Can Help Raise Wages for America’s Women and Men,” Center for Popular Democracy and the Economic Policy Institute, June 2015, http://tinyurl.com/
The Next Step
Popper, Nathaniel, “Banks and Tech Firms Battle Over Something Akin to Gold: Your Data,” The New York Times, March 23, 2017, http://tinyurl.com/
Schroeder, Pete, “Federal Reserve inconsistent in monitoring big banks: auditors,” Reuters, April 3, 2017, http://tinyurl.com/
Skinner, James, “How the Brexit Is Already Taking Its Toll on Goldman Sachs, JPMorgan, Other Big Banks,” The Street, March 29, 2017, http://tinyurl.com/
McCarthy, Niall, “Confidence In The U.S. Economy Reaches Highest Point Since The Financial Crisis [Infographic],” Forbes, April 4, 2017, http://tinyurl.com/
Rooney, Kate, “Fixing housing could bring $300 billion back to US economy, new data show,” CNBC, March 27, 2017, http://tinyurl.com/
Spicer, Jonathan, “Debt load could snag students, hurt U.S. economy: Fed’s Dudley,” Reuters, April 3, 2017, http://tinyurl.com/
David, Javier E., “How a possible Yellen departure could spark a fire under the Fed to cut its $4.5 trillion balance sheet,” CNBC, March 19, 2017, http://tinyurl.com/
Lam, Bourree, “The Fed’s Ongoing Diversity Problem,” The Atlantic, March 24, 2017, http://tinyurl.com/
Wang, Christine, “Fed’s Fischer says he sees two more rate hikes in 2017,” CNBC, March 28, 2017, http://tinyurl.com/
International Central Banks
“Why central banks around the world are dropping euros for pounds,” Asia Times, April 3, 2017, http://tinyurl.com/
Dulaney, Chelsey, “China’s Global Currency Ambitions Falling Flat With Central Banks,” The Wall Street Journal, March 31, 2017, http://tinyurl.com/
Pandey, Swati, and Wayne Cole, “Australia’s central bank holds rates as property market sizzles,” Yahoo Finance, April 4, 2017, http://tinyurl.com/
American Bankers Association
1120 Connecticut Ave., N.W., Washington, DC 20036
Trade association for the banking industry.
Bank of England
Bank of England, Threadneedle St., London, EC2R 8AH
+44 020 7601 4878
Central bank for the United Kingdom.
Center for Popular Democracy (New York office)
449 Troutman St., Suite A, Brooklyn, NY 11237
Nonprofit that organizes the “Fed Up” campaign advocating for the central bank to enhance its focus on full employment and wage growth.
European Central Bank
60640 Frankfurt am Main, Germany
+49 69 1344 1300
Central bank for the 19 countries in the European Union that have adopted the euro.
Constitution Avenue and 20th Street, N.W., Washington, DC 20551
Headquarters for the U.S. central bank.
Federal Reserve Bank of New York
33 Liberty St., New York, NY 10045
The most influential of the Fed’s 12 regional reserve banks and the location where monetary policy is implemented through a series of trades known as open market operations.
Financial Services Forum
601 13th St., N.W., Suite 750 South, Washington, DC 20005
Financial and economic policy trade group for large financial institutions.
Shadow Open Market Committee
An independent group of academics and other economic experts that meets semiannually to critique the policy decisions of the U.S. central bank’s Federal Open Market Committee.