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Federal Reserve's role in preserving financial and monetary stability

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The Role of the Federal Reserve in Preserving Financial and Monetary Stability

Joint Statement by the Department of the Treasury and the Federal Reserve

 

Introduction

Sound economic performance requires both financial stability and monetary stability. As the nation's central bank, the Federal Reserve has critical responsibilities in both areas.

 

The Congress created the Federal Reserve in 1913 in large part in response to the periodic panics and crises that plagued the U.S. financial system in the 19th and early 20th centuries. Over nearly a century, in the service of its original mandate as well as its monetary and regulatory responsibilities, the Federal Reserve has developed wide-ranging institutional expertise regarding financial markets and institutions, foreign as well as domestic. The Federal Reserve also has the unique ability to serve as the lender of last resort, a vital function in crises. For these reasons, it is natural and desirable that the Federal Reserve should play a central role, in cooperation with the Department of the Treasury and other agencies, in preventing and managing financial crises.

 

While the Federal Reserve has traditionally collaborated with other agencies in efforts to preserve financial stability, it alone is responsible for maintaining monetary stability. The monetary policy-making arm of the Federal Reserve, the Federal Open Market Committee (FOMC), determines monetary conditions in the United States, subject to its congressional mandate to foster maximum sustainable employment and stable prices. The Federal Reserve's independence with regard to monetary policy is critical for ensuring that monetary policy decisions are made with regard only to the long-term economic welfare of the nation.

 

This joint statement reflects the common views of the Treasury and the Federal Reserve on the appropriate roles of the Federal Reserve and the Treasury during the current financial crisis and in the future and on the steps necessary to ensure that both financial and monetary stability will be achieved.

 

The Treasury and the Federal Reserve agree on the following broad points:

 

1. Treasury-Federal Reserve cooperation in improving the functioning of credit markets and fostering financial stability

 

The Federal Reserve's expertise and powers are indispensable for preventing and managing financial crises. The programs it has initiated since the onset of this crisis have played a critical role in helping to contain the damage to the broader economy. As long as unusual and exigent circumstances persist, the Federal Reserve will continue to use all its tools working closely and cooperatively with the Treasury and other agencies as needed to improve the functioning of credit markets, help prevent the failure of institutions that could cause systemic damage, and to foster the stabilization and repair of the financial system.

 

2. The Federal Reserve to avoid credit risk and credit allocation

 

The Federal Reserve's lender-of-last-resort responsibilities involve lending against collateral, secured to the satisfaction of the responsible Federal Reserve Bank. Actions taken by the Federal Reserve should also aim to improve financial or credit conditions broadly, not to allocate credit to narrowly-defined sectors or classes of borrowers. Government decisions to influence the allocation of credit are the province of the fiscal authorities.

 

3. Need to preserve monetary stability

 

Actions that the Federal Reserve takes, during this period of unusual and exigent circumstances, in the pursuit of financial stability, such as loans or securities purchases that influence the size of its balance sheet, must not constrain the exercise of monetary policy as needed to foster maximum sustainable employment and price stability. Treasury has in place a special financing mechanism called the Supplementary Financing Program, which helps the Federal Reserve manage its balance sheet. In addition, the Treasury and the Federal Reserve are seeking legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves.

 

4. Need for a comprehensive resolution regime for systemically critical financial institutions

 

The Treasury and the Federal Reserve remain fully committed to preventing the disorderly failure of systemically critical financial institutions. To reduce the risk of future crises, the Treasury and the Federal Reserve will work with the Congress to develop a regime that will allow the U.S. government to address effectively at an early stage the potential failure of any systemically critical financial institution. As part of the framework set forth, the legislation should spell out to the extent possible the expected role of the Federal Reserve and other U.S. government agencies in such resolutions.

 

In the longer term and as its authorities permit, the Treasury will seek to remove from the Federal Reserve's balance sheet, or to liquidate, the so-called Maiden Lane facilities made by the Federal Reserve as part of efforts to stabilize systemically critical financial institutions.

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Guest SFFedReserve

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

 

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

 

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

 

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

 

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

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Guest Mike Larson

At 12:30 today, Fed chief Ben Bernanke proved that what many have suspected all along is indeed true:

 

The U.S. Federal Reserve is patently INSANE!

 

In reporting on this week’s FOMC meetings, “Helicopter Ben” announced that the Fed is going to do the same old thing and expect better results:

 

It’s going to hold interest rates near zero as far as the eye can see ...

 

And it’s going to print $40 BILLION new dollars per month in an attempt to stimulate the economy — a whopping $480 billion per year!

 

In short, it’s doing the same things it has done since 2008 — but expecting better results:

 

Any way you look at it, that’s THE VERY DEFINITION OF INSANITY!

 

Look: The Fed has ALREADY held interest rates near zero percent for four long years, now.

 

Plus, it has ALREADY created $1.8 trillion out of thin air through QE I and QE II ...

 

And it has ALREADY bought hundreds of billions of dollars more worth of long-term Treasuries as part of Operation Twist 1 and 2.

 

So what’s the result?

 

NO IMPACT WHATSOEVER ON THE REAL ECONOMY!

 

Sure — all that free, easy money temporarily buoyed the stock market — but despite everything the Fed has done ...

 

** Unemployment has stayed over 8% for 42 straight months ...

 

** The average family home is STILL falling in value ...

 

** Profits at many major corporations STILL stink — and they’re getting more rotten almost by the day ...

 

** U.S. economic growth is STILL grinding to a near standstill ...

 

** And now, as America approaches the precipice of its great fiscal cliff, the stock market looks for all the world as if it’s a massive bubble about to burst!

 

Worse, the middle class — the very backbone of the U.S. economy — is getting eaten alive:

 

>> HOUSEHOLD INCOME IS PLUNGING: The U.S. Census Bureau just reported that real median household income has now fallen for the fourth straight year.

 

Income has fallen so low, in fact, that when you adjust for inflation, the median family has the same income today as it did in 1967 — 45 long years ago!

 

>> THE INCOME GAP IS WIDENING ALARMINGLY: The Census Bureau is also reporting that the movement of income away from the middle class has just hit a record high.

 

That’s terrible news: Typically this kind of increasing disparity in income occurs just before economic calamities — and today, it’s more extreme even than before the 1929 stock-market crash and the Great Depression!

 

>> U.S. POVERTY IS AT ALL-TIME RECORD HIGH LEVELS: Finally, as if to add insult to injury, the Census Bureau also reports that a staggering 46.2 million Americans now live in poverty!

 

And not only isn’t the Fed HELPING ... its failed efforts to revive the economy are creating a second crisis:

 

Thanks to the Fed’s past money-printing gambits, the Producer Price Index just jumped 1.7% in August — hands-down the biggest surge in producer price inflation going back to June of 2009!

 

**********************************

 

Make no mistake:

 

The U.S. economy is broken.

 

Nothing the Fed can do will fix it.

 

**********************************

 

To the contrary: The Fed’s easy money policies CREATED this crisis by inflating the housing bubble.

 

Now, they’re only making matters worse — doing absolutely NOTHING for the job market, while driving inflation higher!

 

And as America’s great Fiscal Cliff approaches — the catastrophe that JPMorgan says will push America “head-first into the fiscal meat grinder” — the storm clouds are darker than ever.

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