By Thomas Kostigen
The Federal Reserve was in the news again last week for its lending programs aimed to support the U.S. economy during the COVID-19 crisis. Nearly half a trillion dollars earmarked for struggling businesses was requested to be returned to the U.S. Treasury. That essentially cuts off federal government financial assistance to companies affected by the disruption caused by lockdowns, curfews and myriad other mandates. It will cause a widening hole in the business sector that could spill out to the capital markets. The stock market, for example, has received stimulus money and government lending programs favorably, sending prices higher upon their announcements.
The Fed wanted to keep the money and the program in place. Its chairman, Jerome Powell, said that it was too soon to end the lending programs. In a statement, the Fed explained that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
The Federal Reserve System’s mission is clear: It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. And although the Fed is commonly referred to as the central bank of the United States, it isn’t. In fact, the Federal Reserve Act purposely rejected the concept of a central bank. Instead, the Act provided for a central banking “system” consisting of a central governing board and a decentralized operating structure of 12 reserve banks that have a combination of public and private characteristics.
The Federal Reserve Act was established in 1913 in response to the 1907 financial crisis wherein the stock market fell 50 percent from its highs. The Fed was established as a compromise between those who wanted private control of the central bank and those who wanted it as a government function. That’s why today the Fed is a hybrid organization that works to provide liquidity to the economy (also known as open market operations) as any central bank might, and also to provide lending, development, check clearing, and assortment of other financial services for the economy’s benefit.
The Fed today is a very powerful institution because it performs so many functions crucial to employment and interest rate setting. It is meant to be an agnostic force, keeping politics aside for the health and welfare of the economy and the American people. But as the former director of the Office of Management and Budget under President Ronald Reagan, David Stockman, famously wrote in the 1980s, there is always “The Triumph of Politics.”
Still, the Fed does not like to be used for political purposes, which is why, perhaps, Chairman Powell resisted returning COVID funds to the Treasury; it was a clear shot by the Trump administration to limit the incoming Biden administration’s financial assistance options to businesses.
Going forward, Biden seems pleased with stability and low interest rates Powell has kept in place. The Fed chairman’s term is set to expire in 2022, at which time Biden could choose to renominate him—an increasingly likely bet.
Investors might read into that a low interest rate environment for the foreseeable future. To figure how that may affect their portfolios, a financial advisor can lend good guidance and investment advice.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.