Today is Fed Day, when the Federal Open Market Committee wraps up its two-day meeting on the state of the U.S. economy and issues its decision on the appropriate rates for regulating the interbank market. 12 USC 225(a) requires that:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
The FOMC dips into its monetary policy tool kit to achieve the above triple mandate. Up until 2008 to 2010, the primary tool used to set the range for the federal funds rate, the interest range within which member commercial banks would lend and borrow the excess amount of reserves they held either in their bank vaults or in their master accounts with a Federal reserve bank, was open market operations, the buying of selling of securities in the open market.
With the requirement for holding a percentage of deposits in reserve now down to zero, the Fed now relies more on the interest rate it pays banks for keeping reserves in their vaults or Federal reserve bank master accounts (interest on reserve balances or IORB) and the overnight reverse repurchase agreement (ON-RRP), where the Fed sells a security to an eligible counterparty (typically eligible non-banks) and agrees to buy it back the next day, in order to help maintain the federal funds rate.
The Federal Reserve System has caught heat for over the past two- and one-half years for how it has addressed mandate number 2, stable prices. Among the ardent critics have been incoming presumptive winner of the Electoral College, former president Donald Trump. Mr. Trump believes that Jerome Powell, chairman of the Board of Governors of the Federal Reserve System, was too indecisive on the issue of rates.
In addition, Mr. Trump believes that his business acumen gives him better insights versus those of the current (or likely any) board. While Mr. Trump’s comments on the Federal Reserve System and particularly his desire to amplify executive branch influence has made the usual critics increasingly suspect, he is not calling for anymore involvement that he is allowed under current law.
For example, 15 USC section 3101(c) states that:
” (c) The Congress further finds that an effective policy to promote full employment and production, increased real income, balanced growth, a balanced Federal budget, adequate productivity growth, proper attention to national priorities, achievement of an improved trade balance, and reasonable price stability should (1) be based on the development of explicit economic goals and policies involving the President, the Congress, and the Board of Governors of the Federal Reserve System, with maximum reliance on the resources and ingenuity of the private sector of the economy, (2) include programs specifically designed to reduce high unemployment due to recessions, and to reduce structural unemployment within regional areas and among particular labor force groups, and (3) give proper attention to the role of increased exports and improvement in the international competitiveness of agriculture, business, and industry in providing productive employment opportunities and achieving an improved trade balance. “
Based on my reading of the statute, amplifying Mr. Trump’s influence may boil down to exchanging well thought out ideas, the better sharing of data, a few well-written letters and more breakfast meetings between Mr. Trump, his Treasury secretary, and Congressional leaders.
Mr. Trump has not been vocal about the Heritage Foundation’s Project 2025 policy recommendations targeting reform at the Federal Reserve. The Heritage Foundation believes that the Fed’s core activity of rate manipulation needs to be reformed because such activity has been the cause of boom-and-bust cycles.
Either Mr. Trump has not thought through the Heritage Foundation’s recommendations, or, given his lame duck status, Mr. Trump may not want to expend any energy on proposing and shepherding legislation that would amend the Fed’s triple mandate. Also, there is the chance that making any moves to dismantle or reform the Fed may have a near future Trump administration spending time in federal court.
Alton Drew
7 November 2024
I have launched an advocacy campaign called “The Campaign for Real Money.” This campaign calls for the Congress to recognize individually issued currency backed by valuable assets and bank issued currency backed by valuable, employment-creating assets.
The United States’ monetary policy encourages the issuance of deflated dollars based on the issuance of IOUs backed by no productive value. If the United States is to maintain a currency that attracts investors, while competing against the currencies of resource-based countries, the U.S. must issue currencies backed by real money, by productive energy.
The cost of advocating before Congress and the Executive branch is expensive. Your donations will allow me to provide the most effective advocacy. Thank you for your support.
Alton Drew
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