Can it find the economic sweet spot?

Executive Summary

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

Bibliography

Books

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.

Articles

Burns, Katy, “The Oxford Economist Running the Fed’s Interest-Rate Machine,” The Wall Street Journal, Nov. 23, 2015, http://tinyurl.com/mj9s6fc. A behind-the-scenes look at the challenges facing the Fed before its December 2015 “liftoff” – or rate hike – and the official charged with ensuring it went smoothly, Simon Potter of the Federal Reserve Bank of New York.

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/kpskned. A profile of the Fed’s Janet Yellen as she readies for growing congressional criticism during the final year of her term as board chair.

Pollock, Alex J., “It’s High Time to ‘Audit’ the Federal Reserve,” The Wall Street Journal, March 22, 2015, http://tinyurl.com/l8lgvex. A policy expert lays out the case for closer review of the Fed.

Russonello, Giovanni, “How the Fed’s Interest Rate Increase Can Affect You,” The New York Times, Dec. 14, 2016, http://tinyurl.com/khmh7l7. A rundown on how the Fed’s control of interest rates influences the economy and consumer choices.

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/7vqp9qe. A congressionally appointed commission concludes that the Federal Reserve’s deregulation of the banking system contributed to the 2008 financial crisis.

“Financial Turmoil Timeline,” Federal Reserve Bank of New York, http://tinyurl.com/kse5h9z. A timeline compiled by the Federal Reserve Bank of New York details the actions taken by the central bank during the crisis, as well as other government interventions and market events.

“The Road to Normal: New Directions in Monetary Policy,” Annual Report 2015, Federal Reserve Bank of St. Louis, http://tinyurl.com/muqrdg9. Fed analysts provide a detailed but concise account of the central bank’s actions at the height of the crisis, including its plan to lend to a variety of financial institutions and its quantitative easing program.

Binder, Sarah, and Mark Spindel, “Independence and accountability: Congress and the Fed in a polarized era,” The Brookings Institution, April 2016, http://tinyurl.com/l7fozl5. An economist and a hedge fund founder examine congressional efforts to rein in the Fed since the 1940s.

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/jzole3z. A report from two left-leaning organizations calls on the Fed to focus on wage growth as part of its employment mandate.

The Next Step

Big Banks

Popper, Nathaniel, “Banks and Tech Firms Battle Over Something Akin to Gold: Your Data,” The New York Times, March 23, 2017, http://tinyurl.com/m9xfkgt. Big banks are fighting with technology companies over whether they should share customers’ financial data, including financial transaction information.

Schroeder, Pete, “Federal Reserve inconsistent in monitoring big banks: auditors,” Reuters, April 3, 2017, http://tinyurl.com/m5z7y7j. Auditors who examined the Federal Reserve concluded that the U.S. central bank isn’t consistent in its monitoring of big banks, which could cause problems in identifying emerging risks.

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/mtnmuhw. The onset of Brexit – the United Kingdom’s impending withdrawal from the European Union – could hurt the ability of U.S. banks, brokers and investors with London offices to serve clients across Europe.

Economic Outlook

McCarthy, Niall, “Confidence In The U.S. Economy Reaches Highest Point Since The Financial Crisis [Infographic],” Forbes, April 4, 2017, http://tinyurl.com/lxl8cwh. Almost 60 percent of Americans view the U.S. economy positively, the highest percentage since the recession of 2007-09.

Rooney, Kate, “Fixing housing could bring $300 billion back to US economy, new data show,” CNBC, March 27, 2017, http://tinyurl.com/l5b22v7. A drop in homeownership in the past decade is partially to blame for slow U.S. economic growth, according to data from a new study.

Spicer, Jonathan, “Debt load could snag students, hurt U.S. economy: Fed’s Dudley,” Reuters, April 3, 2017, http://tinyurl.com/lc7z7sz. Despite improvements in the job market in the past few years, student loan debt continues to rise and could hurt consumer spending, homeownership and the elevation of lower-income students, according to New York Fed President William Dudley.

Fed Leadership

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/ksvw5k7. A Goldman Sachs economist said that the departure of Fed Chair Janet Yellen and the appointment of new leadership could lead to a period of “heightened uncertainty” in financial markets during the transition.

Lam, Bourree, “The Fed’s Ongoing Diversity Problem,” The Atlantic, March 24, 2017, http://tinyurl.com/n3d248q. The Federal Reserve is facing growing questions about its lack of diversity, with critics warning that homogeneity among its leadership carries downsides.

Wang, Christine, “Fed’s Fischer says he sees two more rate hikes in 2017,” CNBC, March 28, 2017, http://tinyurl.com/lupct4m. Federal Reserve Vice Chairman Stanley Fischer said the central bank will be closely watching the impact of Trump administration policies on the economy and that the Fed plans to raise rates twice more in 2017.

International Central Banks

“Why central banks around the world are dropping euros for pounds,” Asia Times, April 3, 2017, http://tinyurl.com/l9hf5gs. More than two-thirds of 80 central banks favor the British pound over the euro, mainly due to fears of European political instability and increasing anti-European Union attitudes, according to a new Financial Times survey.

Dulaney, Chelsey, “China’s Global Currency Ambitions Falling Flat With Central Banks,” The Wall Street Journal, March 31, 2017, http://tinyurl.com/n9ych2f. Despite China’s attempts to get more central banks to hold the Chinese yuan, the currency accounted for only 1.1 percent of global foreign-exchange reserves in 2016.

Pandey, Swati, and Wayne Cole, “Australia’s central bank holds rates as property market sizzles,” Yahoo Finance, April 4, 2017, http://tinyurl.com/n4zt7n7. The Reserve Bank of Australia kept interest rates at 1.5 percent for an eighth month while trying to contain a soaring housing market and reduce the jobless rate.

Organizations

American Bankers Association
1120 Connecticut Ave., N.W., Washington, DC 20036
1-800-BANKERS (226-5377)
www.aba.com
Trade association for the banking industry.

Bank of England
Bank of England, Threadneedle St., London, EC2R 8AH
+44 020 7601 4878
enquiries@bankofengland.co.uk
www.bankofengland.co.uk/Pages/home.aspx
Central bank for the United Kingdom.

Center for Popular Democracy (New York office)
449 Troutman St., Suite A, Brooklyn, NY 11237
cpd@populardemocracy.org
1-347-985-2220
https://populardemocracy.org
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
info@ecb.europa.eu
https://www.ecb.europa.eu/home/html/index.en.html
Central bank for the 19 countries in the European Union that have adopted the euro.

Federal Reserve
Constitution Avenue and 20th Street, N.W., Washington, DC 20551
1-202-452-3000
www.federalreserve.gov
Headquarters for the U.S. central bank.

Federal Reserve Bank of New York
33 Liberty St., New York, NY 10045
1-212-720-5000
general.info@ny.frb.org
www.newyorkfed.org
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
1-202-457-8765
http://financialservicesforum.org
Financial and economic policy trade group for large financial institutions.

Shadow Open Market Committee
e21@manhattan-institute.org
www.shadowfed.org
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.

DOI: 10.1177/237455680311.n1