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These policy moves, especially the efforts to cool the economy, are supposed to discipline American businesses and consumers from lending and spending in a way that would trigger runaway inflation. Primarily, the Fed controls prices by helping money flow around the economy, either by buying bonds or lowering interest rates, and reining it in when the economy looks as if it's running too hot, usually by ceasing bond purchases and raising rates. But what if our ideas of the Fed's supposed almighty power to control inflation are based on faulty thinking? What if other parts of our government actually hold the lever for dealing with sudden price increases, like what we're seeing in the post-COVID economy? And what would that mean for how we think about the Fed's power more broadly?īefore answering those questions, let's review how the Fed is supposed to manage inflation. But at the core of these expectations is that the central bank will keep prices rising slowly without soaring out of control. To deal with price rises and inequality, legislators can't just defer to the Fed they have to get their hands dirty and intervene in the real economy. Instead of piling all of the nation's problems on the back of Jay Powell, companies, households and workers need other institutions - most notably Congress - to step up and take on their share of the economic problem-solving. And this overreliance on the Fed shows just how far America's policy muscles have atrophied. But as powerful as the Fed has become since the 1970s, the central bank as we know it has run up against the limits of its power - if it even had as much power as we thought all along.
These policymakers, economists, activists, and even the media have come to see the Fed as the country's sole economic savior - the only answer to the things that ail us. Even climate activists are taking shots at the Fed for not doing enough to help speed the financial system away from fossil-fuel investments.īut all of the hullabaloo around the Fed, some deserved and some not, is ultimately driven by the same phenomenon. It doesn't help that the central bank is simultaneously being rocked by an ethics scandal regarding personal trading by senior officials and drawing criticism for walking back regulations designed to make banks safer after the financial crisis. Now inflation is biting into the economic recovery, and projections for gross domestic product and employment growth are getting less encouraging.Įven the programs that the Fed was praised for - bond buying and low interest rates - are now attracting concerns that the Fed is driving the soaring prices of stocks and exacerbating wealth inequality. Since the 2008 financial crisis, the Fed's power has swelled, and over the past year and a half, it has pumped an eye-watering amount of money into the financial system. With inflation measures spiking to 30-year highs in October, the pressure on Powell has only mounted. But a lot has changed since then: This fall, it seems everyone - politicians, activists, and economists - has questioned Powell and the Federal Reserve about the future of their massive experiment.
Federal Reserve Chair Jerome Powell enjoyed near-universal praise as " The World's Best Bureaucrat." The former private-equity executive was cheered for leading the central bank's unprecedented efforts to stabilize the financial system and prop up the global economy amid the pandemic.