The Federal Reserve System (Fed) is an agency that drives financial stability, being the key regulator of all its bank members. It acts in the capacity of the lender of last resort to institutions that are its members and have no other alternative to borrow from (McDowell, 2017). Concerning its powers, it acts as the central bank in the United States, performing a key role in establishing a reliable and efficient payment system. It additionally controls and oversees bank operations in the same capacity while developing monetary policies (Skinner & Binder, 2021). Regarding its policies, the Federal Reserve Act gives it the mandate to develop monetary policy to promote the maximum possible employment rates (Skinner & Binder, 2021). Doing so additionally stabilizes prices while moderating interest rates in the long run. Lastly, regarding the people involved, it is governed by a Board of Governors localized in Washington, D.C. (Skinner & Binder, 2021). It is managed by a seven-member board, which the U.S. President nominates, subject to Senate approval.
Summary of The Article
The article I have chosen regarding recent Federal Reserve activities is entitled ‘The logic and limits of the Federal Reserve Act’ by Menand, published on 16th February 2022. Within the past half-decade, the Federal Reserve in the United States has saved over-leveraged financial institutions, bought a significant number of mortgage-backed securities, and established new amenities to aid the local government, regular businesses, and non-profit organizations. Some people claim that it has performed beyond expected, while others still think it should do more in approaching matters of infrastructure, racial inequity, and climate change. The article aims to clarify the stakes and nature of this argument by unveiling the Federal Reserve Act’s limits and logic. It claims that for one to comprehend the Federal Reserve System, it helps to first understand the banking and money system of the United States. The system utilizes investor-owned and publicly-chartered banks in issuing much of the monetary supply.
Congress engineered the Fed for specific purposes, the first being to control the U.S. banking and money system. Further, it made a wide set of equipment available for the reserve to attain a particular objective – ensuring that the money and banking system avails enough monetary float, keeping economic tools and resources meaningfully utilized countrywide. However, the emergence of shadow banks that provide financial services in the absence of bank charters has discouraged its determination. As it tries to adapt to the harsh environment, the Fed has been forced to perform tasks beyond its initial purpose. Such has warranted it being called out for doing more and being pleaded with to downregulate its operations. These contrasting interests portray rival objectives concerning responsibility division in money creation among private firms, technocrats, and politicians. The objectives are usually unpegged from the deliberations that reflect existing policies and laws, favoring investors and technocrats and disfavoring politicians. The article appreciates that by re-examining the statutory framework of the Fed, one would visualize the inconsistencies in the ongoing debate and envision the reserve’s future capacity.
The Federal Reserve Chair’s Power
The article is not so clear in supporting the idea that the chair of the Federal Reserve is among the most powerful positions in the United States. Initially, it supports the claim by admitting that the Fed has saved several over-leveraged financial institutions, bought many mortgage-backed securities, and established new amenities to aid the local government, regular businesses, and non-profit organizations. Such actions portray the institution’s power, which its chair would initiate. However, the article later opposes the claim by appreciating that the Fed has its limits and logic within which it operates. The emergence of shadow banks additionally portrays the limitations the chair of the Federal Reserve experiences now that they cannot regulate the emergence of such banks, which come to haunt them.
References
Menand, L. (2022). The logic and limits of the Federal Reserve Act. SSRN Electronic Journal.
McDowell, D. (2017). Brother, can you spare a billion?
Skinner, C. P., & Binder, C. (2021). Laboratories of Central Banking. SSRN Electronic Journal.