The Fed likes to consider itself independent from political influence to decide on monetary policy. In fact, when the Fed’s independence is threatened, they get quite defensive!
Sadly, the Fed is not as independent as it thinks it is.
Rodney wrote in a recent Economy & Markets about the interest earned on the Fed’s bond portfolio. Since the Fed is not a “for profit” institution, any profits are sent to the Treasury. In 2014, the Fed reported a net income of $101.3 billion. After interest payments, that still left $96.9 billion in profits which went directly to the Treasury.
Since 2008, the Fed’s balance sheet has grown from about $850 billion in assets… to over $4.5 trillion in assets, all because of quantitative easing (QE). When those bonds mature, where will the proceeds go? You guessed it. The U.S. Treasury.
Doesn’t sound like the best recipe for complete independence from political pressure…
Even worse, it’s not the best recipe for economic stimulation, period.
Now that QE has ended — after injecting trillions of dollars into the economy — stocks prices are at near all-time highs, and bond yields are near all-time lows. That’s all good and well… But has deflation been averted? Have jobs returned to where they were before 2008? Is the economy fixed?
The way I see it, the Fed is in a “lose-lose” situation. They’ve been given increasing responsibilities by Congress, but are supposedly not beholden to political pressure. Are they balancing these duties properly? Who checks to make sure?
The Fed uses tools like changing the interest rate banks pay to borrow overnight to influence policy. That’s great, but they also used the same freedom to attempt to stimulate our economy with QE and save it from collapse. At that point, QE had yet to be proven effective. But they did it anyway!
On top of influencing interest rates, they created trillions of dollars out of thin air by stealing value from the dollars we all hold and then giving those gains to the Treasury. Of course, this was all in the hope of saving the markets, the economy, and jobs and price stability. That makes it okay, right?
I’ll let you draw your own conclusions on just how “independent” the Fed really is… and how well that system is working.
But I’ll offer this: The Fed may need independence to make certain monetary decisions without political pressure, but they also need to be held accountable for the decisions they make.
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