The Fed Has Too Much to Do

Peter J. Wallison

The Federal Reserve announced earlier this month that it will launch a real-time payment service called “FedNow” sometime in the next five years. The move demonstrates that the independent central bank, already one of the most unaccountable agencies in the federal government, is accumulating too much power. In recent years the Fed has fended off several efforts to determine whether its expenditures—which aren’t appropriated by Congress—are consistent with policies that the American people and their representatives want the central bank to pursue.

Even a partial list of the Fed’s various roles is astonishing. It is the monetary authority of the U.S. and bears particular responsibility for interest rates and employment. But it is also the regulator and supervisor of banks, bank holding companies, savings-and-loan associations, securities holding companies, designated nonbank financial companies, various financial-market utilities such as clearinghouses, the U.S. operations of foreign banks, and the operation of the most important elements of the U.S. payments system. This expansive portfolio of responsibilities creates numerous conflicts of interests—raising interest rates, keeping inflation under control and stimulating employment are all close to zero-sum games—and FedNow will compete with the banking institutions it regulates.

The Fed is one of those magical government agencies that somehow manage to acquire more power when they fail. Consider the Fed’s oversight of banks and bank holding companies between 2002 and 2007. A gigantic housing price bubble was inflating, driven by the expansion of the subprime mortgage market. As this was occurring, the Fed allowed some banks to place risky subprime loans into off-balance-sheet vehicles, supported by short-term borrowings. But when the short-term lenders disappeared, the banks had to take these assets back on their balance sheets.

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