I’ve written about the power of the Federal Reserve in numerous articles over the years (here’s my most recent article), but I don’t think society as a whole truly comprehends the central bank’s influence. In short, it’s massive and far-reaching.
The Federal Reserve saved us from a depression
Current Fed policy was put in place to support the economy and protect it (and 330 million Americans) from a second devastating Great Depression. It has worked. But as a result, it has triggered massive bullishness in markets, leading to a lopsided recovery. Those invested in the markets have seen their wealth grow. Everyone else continues to struggle.
Many people have opinions about the policy, but I’m not here to judge current (or past) Fed policies. As academicians, committee members draw on knowledge, financial models and experience during the Global Financial Crisis. Whether we like it or not is inconsequential.
Central banks around the world follow the Fed
When the Federal Reserve announces a new monetary policy, it’s often replicated by other central banks. The Federal Open Market Committee (FOMC) creates the policies. It’s made up of 12 members: seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. It’s charged with two goals: achieving price stability and maximum employment. This is why Fed policy sets the standard.
As I mentioned above, the stock market has benefitted from the current “easy money” policy over the past year. This in turn has created an enormous money supply, and with constant bond purchases, the Fed’s balance sheet is massive. With a stroke, the Fed has simply blotted out any fear of risk.
Their timeline is limitless
The above examples of the Fed’s influence are well-known. But they have another hidden power: a limitless timeline.
We have no idea when the pandemic will officially end and the economy and jobs market will be back to normal. The Fed can extend itself for as long as it takes. It has been a risky move, but it might eventually pay off. The inflation genie might be trying to squeeze out of the bottle, so we’ll have to wait and see how this unfolds.
For now, don’t fight the Fed!