On the President's Desk: The Federal Reserve
The Federal Reserve System (also referred to as the Federal Reserve or the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the passage of the Federal Reserve Act, after a series of financial "panics" or recessions led to the desire for central control of the monetary system in order to address any future financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Fed. The Fed has three key objectives for monetary policy: 1. Maximizing employment, 2. Keeping inflation under control and 3. Moderating interest rates. Its duties have expanded over the years to include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions.
The Federal Reserve is governed by a board of governors appointed by the President known as the Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately owned commercial banks. Nationally chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region.
The federal government receives all of the Fed's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an prudent surplus is maintained. In 2015, the Federal Reserve earned net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury. Although an instrument of the US Government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone for that matter in the executive or legislative branches of government. It does not receive funding appropriated by the Congress, and the terms of the members of the board of governors span across presidential and congressional terms.
The history of national currency dates back to the Revolutionary War. In 1775, the Continental Congress, as well as the states, began issuing paper currency, calling the bills "Continentals". The Continentals were backed by future tax revenue, and were used to help finance the war. Overprinting and British counterfeiting, caused the value of the Continental to drop quickly. As a result, the new nation banned the issuance of paper currency by the various states, and limited the states' ability to make anything but gold or silver coin legal tender. In 1791, the government granted the First Bank of the United States a charter to operate as the U.S. central bank until 1811. The First Bank of the United States came to an end under President James Madison because Congress refused to renew its charter. The Second Bank of the United States was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later under President Andrew Jackson when its charter expired. A third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.
The main motivation for the third central banking system arose out of the Panic of 1907, which caused a renewed desire among legislators, economists, and bankers for an overhaul of the monetary system. During the last quarter of the 19th century and the beginning of the 20th century, the United States economy went through a series of financial panics. In 1908, Congress enacted the Aldrich–Vreeland Act, which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform. After a series of recommendations which were repeatedly rejected by Congress, Senator Nelson Aldrich met with representatives of the nation's top finance and developed what became the basis of the Federal Reserve Act. The House voted on December 22, 1913, with 298 voting yes to 60 voting no. The Senate voted 43–25 on December 23, 1913. President Woodrow Wilson signed the bill into law later that day.
In the early part of this century, after years of financial deregulation, banks began lending subprime mortgages to more and more home buyers, causing a housing bubble. Many of these banks also invested in credit default swaps and derivatives. These were essentially bets on the soundness of these loans. When housing prices starting declining in 2007, the Bush administration brought about the passage the Economic Stimulus Act of 2008. Falling home prices started threatening the financial viability of many institutions and many of these institutions held mortgages secured by assets below the value of their collateral. Bear Stearns, a prominent U.S.-based investment bank, was on the brink of failure in March 2008. Recognizing the threat of a financial crisis, President George W. Bush allowed Treasury Secretary Paulson to arrange for another bank, JPMorgan Chase, to tank over most Bear Stearn's assets. Shortly afterwords, Lehman Brothers was also on the verge of bankruptcy. Both Bush and Paulson were reluctant to intervene on behalf of Lehman Brothers. The firm declared bankruptcy on September 15.
Paulson hoped that the financial industry had shored itself up after the failure of Bear Stearns and that the failure of Lehman Brothers would not strongly impact the economy, but news of the failure caused stock prices to tumble and froze credit. American International Group (AIG), another major financial institution, was also on the brink of failure. In fear a financial collapse, Paulson and the Federal Reserve took control of AIG. Hoping to shore up the other banks, Bush and Paulson proposed the Emergency Economic Stabilization Act of 2008, which would create the $700 billion Troubled Asset Relief Program (TARP), in which the federal government would buy toxic assets. The House rejected TARP in a 228-205 vote. Only about one third of the Republican caucus supported the bill. After the Dow Jones Industrial Average dropped 778 points on the day of the House vote, the House and Senate both passed TARP. TARP helped end the financial crisis, but it did not prevent the onset of the Great Recession.
Upon entering office, President Barack Obama signed into law a $787 billion economic stimulus bill that included spending for health care, infrastructure, education, various tax breaks and incentives, and direct assistance to individuals. The tax provisions of the law temporarily reduced taxes for 98 percent of taxpayers, bringing tax rates to their lowest levels in 60 years. Obama asked for a second major stimulus package in December 2009, but no major second stimulus bill passed. Obama also launched a second bailout of US automakers, likely saving General Motors and Chrysler from bankruptcy at the cost of $9.3 billion. For homeowners in danger of defaulting on their mortgage due to the subprime mortgage crisis, Obama launched several programs. He also re-appointed Ben Bernanke as Chair of the Federal Reserve Board in 2009, and appointed Janet Yellen to succeed Bernanke in 2013. Short-term interest rates remained near zero for much of Obama's presidency, and the Federal Reserve did not raise interest rates during Obama's presidency until December 2015.
The unemployment rate reached a peak in October 2009 at 10.1%, but the unemployment rate fell to 4.7% in December 2016. The recovery from the Great Recession was marked by a lower labor force participation rate, some economists attributing the lower participation rate partially to an aging population and people staying in school longer. The recovery also exposed the growing income inequality in the United States, which the Obama administration highlighted as a major problem. GDP growth returned in the third quarter of 2009, expanding at a 1.6% pace, followed by a 5.0% increase in the fourth quarter. Growth continued in 2010, posting an increase of 3.7% in the first quarter, with lesser gains throughout the rest of the year. Overall, the economy expanded at a rate of 2.9% in 2010.[118] The country's GDP consistently grew by about 2% in 2011, 2012, 2013, and 2014. However, median household income (adjusted for inflation) fell to $53,600 in 2014, down from an inflation-adjusted $57,400 in 2007, just before the start of the Great Recession. The poverty rate peaked at 15.1% in 2010 but declined to 13.5% in 2015, which was still higher than the 12.5% pre-recession figure of 2007. The relatively small GDP growth rates in the United States and other developed countries following the Great Recession left economists and others wondering whether U.S. growth rates would ever return to the levels seen in the second half of the twentieth century.
President Donald Trump was elected on a promise to make economic conditions better for those left behind in the recovery from the great recession. His economic policies centered around tax cuts, deregulation, trade protectionism and immigration reduction. President Trump has claimed that his policies would spur much higher GDP growth, stating in December 2017, "I see no reason why we don't go to 4, 5, even 6 percent." In July 2018, the President said, "We have added 3.7 million new jobs since the election, a number that is unthinkable if you go back to the campaign. Nobody would have said it."
During the 2016 campaign, Trump proposed $1 trillion in infrastructure investments. In February 2018, Trump released a $1.5 trillion federal infrastructure plan, but left the details of the plan up to Congress. Congress showed little enthusiasm for the plan.
In September 2017, the administration proposed a tax overhaul. The proposal included change the number of tax brackets for individuals from seven to three, with tax rates of 12%, 25%, and 35%. It also called for the elimination of a number of personal exemptions, a doubling of the standard deduction, and elimination of many itemized deductions, but retaining the deductions for mortgage interest and charitable contributions.
President Trump has repeatedly sought to intervene in the economy by attacking specific corporations for their policies such as out-sourcing. He sought to compel power grid operators to buy coal and nuclear energy, and sought tariffs on metals to protect domestic metal producers.He also publicly attacked Boeing and Lockheed Martin, and singled out Amazon for criticism and called for ending a mutually lucrative arrangement between Amazon and the US Postal Service. He has also expressed opposition to the merger between Time Warner (the parent company of CNN) and AT&T.
Last month President Trump was critical of the Fed for continuing to raise interest rates despite some recent market turbulence. At a campaign rally in Erie, Pennsylvania, he said "I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy." He criticized the Fed for raising interest rates three times this year. The Fed is largely expected to hike once more before year-end. Criticism of the Fed is rare from a sitting president, given the separation of power that the Executive branch has over the Fed. President Trump has expressed concern that interest rates have been on the rise over the past several weeks, with the benchmark 10-year Treasury note climbing to its highest level in more than seven years. After the central bank's move to hike rates a third time this year, Fed Chair Powell suggested that rates have further room to rise. Powell said that he had not discussed interest rates with the president. Following is a video of the President's criticism of the Federal Reserve.
The Federal Reserve is not under presidential control, but its actions have a profound effect on the economy and on the fiscal policy set by the president. Monitoring and reacting to the actions of the Fed will continue to be a pressing issue on the President's Desk.
The Federal Reserve is governed by a board of governors appointed by the President known as the Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately owned commercial banks. Nationally chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region.
The federal government receives all of the Fed's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an prudent surplus is maintained. In 2015, the Federal Reserve earned net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury. Although an instrument of the US Government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone for that matter in the executive or legislative branches of government. It does not receive funding appropriated by the Congress, and the terms of the members of the board of governors span across presidential and congressional terms.
The history of national currency dates back to the Revolutionary War. In 1775, the Continental Congress, as well as the states, began issuing paper currency, calling the bills "Continentals". The Continentals were backed by future tax revenue, and were used to help finance the war. Overprinting and British counterfeiting, caused the value of the Continental to drop quickly. As a result, the new nation banned the issuance of paper currency by the various states, and limited the states' ability to make anything but gold or silver coin legal tender. In 1791, the government granted the First Bank of the United States a charter to operate as the U.S. central bank until 1811. The First Bank of the United States came to an end under President James Madison because Congress refused to renew its charter. The Second Bank of the United States was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later under President Andrew Jackson when its charter expired. A third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.
The main motivation for the third central banking system arose out of the Panic of 1907, which caused a renewed desire among legislators, economists, and bankers for an overhaul of the monetary system. During the last quarter of the 19th century and the beginning of the 20th century, the United States economy went through a series of financial panics. In 1908, Congress enacted the Aldrich–Vreeland Act, which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform. After a series of recommendations which were repeatedly rejected by Congress, Senator Nelson Aldrich met with representatives of the nation's top finance and developed what became the basis of the Federal Reserve Act. The House voted on December 22, 1913, with 298 voting yes to 60 voting no. The Senate voted 43–25 on December 23, 1913. President Woodrow Wilson signed the bill into law later that day.
In the early part of this century, after years of financial deregulation, banks began lending subprime mortgages to more and more home buyers, causing a housing bubble. Many of these banks also invested in credit default swaps and derivatives. These were essentially bets on the soundness of these loans. When housing prices starting declining in 2007, the Bush administration brought about the passage the Economic Stimulus Act of 2008. Falling home prices started threatening the financial viability of many institutions and many of these institutions held mortgages secured by assets below the value of their collateral. Bear Stearns, a prominent U.S.-based investment bank, was on the brink of failure in March 2008. Recognizing the threat of a financial crisis, President George W. Bush allowed Treasury Secretary Paulson to arrange for another bank, JPMorgan Chase, to tank over most Bear Stearn's assets. Shortly afterwords, Lehman Brothers was also on the verge of bankruptcy. Both Bush and Paulson were reluctant to intervene on behalf of Lehman Brothers. The firm declared bankruptcy on September 15.
Paulson hoped that the financial industry had shored itself up after the failure of Bear Stearns and that the failure of Lehman Brothers would not strongly impact the economy, but news of the failure caused stock prices to tumble and froze credit. American International Group (AIG), another major financial institution, was also on the brink of failure. In fear a financial collapse, Paulson and the Federal Reserve took control of AIG. Hoping to shore up the other banks, Bush and Paulson proposed the Emergency Economic Stabilization Act of 2008, which would create the $700 billion Troubled Asset Relief Program (TARP), in which the federal government would buy toxic assets. The House rejected TARP in a 228-205 vote. Only about one third of the Republican caucus supported the bill. After the Dow Jones Industrial Average dropped 778 points on the day of the House vote, the House and Senate both passed TARP. TARP helped end the financial crisis, but it did not prevent the onset of the Great Recession.
Upon entering office, President Barack Obama signed into law a $787 billion economic stimulus bill that included spending for health care, infrastructure, education, various tax breaks and incentives, and direct assistance to individuals. The tax provisions of the law temporarily reduced taxes for 98 percent of taxpayers, bringing tax rates to their lowest levels in 60 years. Obama asked for a second major stimulus package in December 2009, but no major second stimulus bill passed. Obama also launched a second bailout of US automakers, likely saving General Motors and Chrysler from bankruptcy at the cost of $9.3 billion. For homeowners in danger of defaulting on their mortgage due to the subprime mortgage crisis, Obama launched several programs. He also re-appointed Ben Bernanke as Chair of the Federal Reserve Board in 2009, and appointed Janet Yellen to succeed Bernanke in 2013. Short-term interest rates remained near zero for much of Obama's presidency, and the Federal Reserve did not raise interest rates during Obama's presidency until December 2015.
The unemployment rate reached a peak in October 2009 at 10.1%, but the unemployment rate fell to 4.7% in December 2016. The recovery from the Great Recession was marked by a lower labor force participation rate, some economists attributing the lower participation rate partially to an aging population and people staying in school longer. The recovery also exposed the growing income inequality in the United States, which the Obama administration highlighted as a major problem. GDP growth returned in the third quarter of 2009, expanding at a 1.6% pace, followed by a 5.0% increase in the fourth quarter. Growth continued in 2010, posting an increase of 3.7% in the first quarter, with lesser gains throughout the rest of the year. Overall, the economy expanded at a rate of 2.9% in 2010.[118] The country's GDP consistently grew by about 2% in 2011, 2012, 2013, and 2014. However, median household income (adjusted for inflation) fell to $53,600 in 2014, down from an inflation-adjusted $57,400 in 2007, just before the start of the Great Recession. The poverty rate peaked at 15.1% in 2010 but declined to 13.5% in 2015, which was still higher than the 12.5% pre-recession figure of 2007. The relatively small GDP growth rates in the United States and other developed countries following the Great Recession left economists and others wondering whether U.S. growth rates would ever return to the levels seen in the second half of the twentieth century.
President Donald Trump was elected on a promise to make economic conditions better for those left behind in the recovery from the great recession. His economic policies centered around tax cuts, deregulation, trade protectionism and immigration reduction. President Trump has claimed that his policies would spur much higher GDP growth, stating in December 2017, "I see no reason why we don't go to 4, 5, even 6 percent." In July 2018, the President said, "We have added 3.7 million new jobs since the election, a number that is unthinkable if you go back to the campaign. Nobody would have said it."
During the 2016 campaign, Trump proposed $1 trillion in infrastructure investments. In February 2018, Trump released a $1.5 trillion federal infrastructure plan, but left the details of the plan up to Congress. Congress showed little enthusiasm for the plan.
In September 2017, the administration proposed a tax overhaul. The proposal included change the number of tax brackets for individuals from seven to three, with tax rates of 12%, 25%, and 35%. It also called for the elimination of a number of personal exemptions, a doubling of the standard deduction, and elimination of many itemized deductions, but retaining the deductions for mortgage interest and charitable contributions.
President Trump has repeatedly sought to intervene in the economy by attacking specific corporations for their policies such as out-sourcing. He sought to compel power grid operators to buy coal and nuclear energy, and sought tariffs on metals to protect domestic metal producers.He also publicly attacked Boeing and Lockheed Martin, and singled out Amazon for criticism and called for ending a mutually lucrative arrangement between Amazon and the US Postal Service. He has also expressed opposition to the merger between Time Warner (the parent company of CNN) and AT&T.
Last month President Trump was critical of the Fed for continuing to raise interest rates despite some recent market turbulence. At a campaign rally in Erie, Pennsylvania, he said "I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy." He criticized the Fed for raising interest rates three times this year. The Fed is largely expected to hike once more before year-end. Criticism of the Fed is rare from a sitting president, given the separation of power that the Executive branch has over the Fed. President Trump has expressed concern that interest rates have been on the rise over the past several weeks, with the benchmark 10-year Treasury note climbing to its highest level in more than seven years. After the central bank's move to hike rates a third time this year, Fed Chair Powell suggested that rates have further room to rise. Powell said that he had not discussed interest rates with the president. Following is a video of the President's criticism of the Federal Reserve.
The Federal Reserve is not under presidential control, but its actions have a profound effect on the economy and on the fiscal policy set by the president. Monitoring and reacting to the actions of the Fed will continue to be a pressing issue on the President's Desk.