I have written numerous articles over the years about the power of the Federal Reserve (here is my most recent article), but I don’t think society as a whole really understands the influence of the central bank. In short, it’s massive and far-reaching.
The Federal Reserve saved us from depression
Current Fed policies were put in place to support the economy and protect it (and 330 million Americans) from a second devastating global economic crisis. It worked. As a result, however, it has caused a massive upward movement in the markets which has resulted in a one-sided rebound. Those who have invested in the markets have seen their fortunes grow. Everyone else continues to fight.
Lots of people have opinions about this policy, but I’m not here to judge current (or previous) Fed policies. As academics, the committee members draw on knowledge, financial models and experience during the global financial crisis. Whether we like it or not doesn’t matter.
Central banks around the world are following the Fed
When the Federal Reserve announces a new monetary policy, it is often repeated by other central banks. The Federal Open Market Committee (FOMC) creates the guidelines. It consists 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 Reserve Bank’s 11 remaining presidents, who take turns serving one-year terms. It has two goals: price stability and maximum employment. For this reason, the Fed’s policy is setting standards.
As mentioned above, the stock market benefited from the current “easy money” policy over the past year. This in turn has created a tremendous amount of money, and with constant bond purchases, the Fed’s balance sheet is massive. With a stroke, the Fed simply eradicated any fear of risk.
Your timeline is limitless
The above examples of Fed 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 economic and labor market will be back to normal. The Fed can extend for as long as it takes. It was a risky move, but it could pay off at some point. The inflationary spirit might be trying to squeeze out of the bottle so we’ll have to wait and see how this plays out.
Don’t fight the Fed now!