For Better or Worse, Fed Is Just Doing Its Job

About Edwin Truman:

Edwin M. Truman is a senior fellow at the Peterson Institute for International Economics. He served as assistant secretary of the US Treasury for International Affairs from December 1998 to January 2001 and returned as counselor to the secretary March-May 2009. He directed the Division of International Finance of the Board of Governors of the Federal Reserve System from 1977 to 1998. From 1983 to 1998, he was one of three economists on the staff of the Federal Open Market Committee.

The Federal Reserve's actions over the past four years have been fully consistent with its mandate to guard against inflation and promote the prosperity of the U.S. economy and the stability of our financial system.

The Federal Reserve System was established by an act of Congress in 1913 after years of deliberation following the Panic of 1907. The new central bank was seen as needed to provide the nation with a safer, more flexible, and more stable monetary and financial system. Subsequent legislation during the Great Depression transformed its structure and expanded its authorities, and later there was legislation that further modified and expanded its activities. However, the core mandate of the Federal Reserve has remained essentially the same for almost a century. It rests on four pillars:

1. Conduct of U.S. monetary policy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
2. Supervision and regulation of U.S. banks to ensure their safety and soundness.
3. Maintenance of the stability of the financial system and limiting systemic risks in financial markets.
4. Provision of services to the financial system including the U.S. payments system.

The actions of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee since the summer of 2007 have been derived from this four-part mandate and the powers granted by the Congress to carry it out.

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Most of the Federal Reserve's actions--such as the large-scale asset purchase program known as quantitative easing two (QE2)--were conventional in nature even if they were unusual in how they achieved their effects. A few measures adopted by the Federal Reserve were unconventional and involved the exercise of seldom-used powers.

One can disagree with the content of some Federal Reserve decisions or question their effectiveness without doubting whether they fell under the Federal Reserve's mandate. Each decision, along with its underlying legal authority, was debated within the Federal Reserve. In the end, each was adopted either unanimously or by a substantial majority by the relevant Federal Reserve decision-making body. However, no one should doubt the dedication and sincerity of Federal Reserve decision makers in acting in a manner consistent with their understanding of the Federal Reserve's mandate and their obligations under the Federal Reserve Act.

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Federal Reserve