cochrane4_Brooks Kraft Getty Images_fed reserve Brooks Kraft Getty Images

Why Isn't the Fed Doing its Job?

In addressing the economic and financial fallout of the COVID-19 pandemic, the US Federal Reserve has not only failed to ensure price stability, but has also doubled down on the misguided approach of the post-2008 era. The result is a financial system oriented around dangerously misaligned incentives.

STANFORD – The nomination of new members to the US Federal Reserve Board offers an opportunity for Americans – and Congress – to reflect on the world’s most important central bank and where it is going.

The obvious question to ask first is how the Fed blew its main mandate, which is to ensure price stability. That the Fed was totally surprised by today’s inflation indicates a fundamental failure. Surely, some institutional soul searching is called for.

Yet, while interest-rate policies get headlines, the Fed is now most consequential as a financial regulator. Another big question, then, is whether it will use its awesome power to advance climate or social policies. For example, it could deny credit to fossil-fuel companies, demand that banks lend only to companies with certified net-zero emissions plans, or steer credit to favored alternatives. It also could decide that it will start regulating explicitly in the name of equality or racial justice, by telling banks where and to whom to lend, whom to hire and fire, and so forth.

https://prosyn.org/fUmCNWp