The Federal Reserve’s Role in the Economy

The U.S. government’s system of checks and balances applies not only to its distribution of power but also to its economic viability. The Securities and Exchange Commission regulates the investment industry, the Consumer Financial Protection Bureau safeguards the interests of consumers and a banking supervisory system regulates U.S. monetary policy. That’s where the Federal Reserve Board comes in.

For example, the Federal Reserve is expected to step in if the newly passed tax reform legislation does what Congress projects it will do -- spur a jump in economic growth. If growth is considered excessive, it frequently leads to higher levels of employment, increased wages and higher prices. When that happens, it’s up to the Federal Reserve’s Federal Open Market Committee (FOMC) to regulate interest rates to help tamp down the negative impacts of high inflation -- such as another recession.1

The Fed has a dual mandate to maximize employment while maintaining a stable price growth rate. To do this, the Fed targets a 2 percent inflation rate. If inflation rises above that threshold, the Fed is likely to increase the benchmark federal funds rate. This is the interest rate that banks charge one another for overnight lending. The trickle-down effect of this action is to dampen economic growth by raising the cost of credit to consumers.2

These government actions are interwoven so that no one agency can drastically impact the U.S. economy without some form of checks and balances. And this is a good thing. It’s like managing a household budget. If you spend too much in one area, you won’t be able to save enough. If you need helping keeping your own personal budget in check, we’re happy to look over your spending to establish a financial strategy designed to meet your retirement goals. Please contact us to schedule a consultation.

Over the past six months, there’s been a fair amount of disruption among the Fed’s board members. William Dudley, president of the Federal Reserve Bank of New York, announced that he will retire in mid-2018, several months before the end of his term in January 2019. Jeffery Lacker, president of the Richmond Fed, resigned unexpectedly in April 2017, and his post remains vacant. President Trump recently nominated another sitting Fed governor, Jerome Powell, to succeed Janet Yellen as Fed chair when her leadership term expires on Feb. 3, 2018. Although her term as a governor doesn’t expire until 2024, Yellen announced she would resign from all Fed posts as soon as Powell was confirmed and sworn in as Fed chairman.3

On a final note, the FOMC made its final interest rate increase for 2017 in December and projected three increases in 2018. Yellen told reporters, “This change highlights that the committee expects the labor market to remain strong, with sustained job creation, ample opportunities for workers and rising wages.”4

Back to Articles

1Arthur Delaney and Daniel Marans. Huffington Post. Nov. 30, 2017. “How the Federal Reserve Could Rain on Trump’s Tax Cut Parade.” Accessed Dec. 4, 2017.
3Michael Ng and David Wessel. Brookings. Nov. 27, 2017. “Janet Yellen and Bill Dudley are leaving the Fed. Who’ll be next to go?” Accessed Dec. 4, 2017.
4Christopher Condon and Craig Torres. Bloomberg Markets. Dec.13, 2017. “Fed Raises Rates, Eyes Three 2017 Hikes as Yellen Era Nears End.” Accessed Dec. 18, 2017.

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