In an op-ed piece published in the Wall Street Journal, U.S. Department of the Treasury Secretary Scott Bessent stated that the Federal Reserve should be relieved of its duty in regulating the nation’s banks.
In his piece titled “The Fed’s ‘Gain of Function’ Monetary Policy,” Bessent states: “Overuse of nonstandard policies, mission creep and institutional bloat threaten the central bank’s independence. The Fed must change course. Its standard tool kit has become too complex to manage, with uncertain theoretical underpinnings. Simple and measurable tools, aimed at a narrow mandate, are the clearest way to deliver better outcomes and safeguard central-bank independence over time.”
The role of the Federal Reserve is to conduct monetary policy to achieve maximum employment and stable prices, supervise and regulate banks to ensure financial system stability, provide financial services to depository institutions and the government, and maintain the nation’s payments system to facilitate transactions. Its end goal is to create a safer, more flexible, and stable monetary and financial system nationwide.
Bessent’s essay contends that the central bank has steered away from its core mission of promoting full employment, stable prices, and moderating long-term interest rates.
“The Fed now regulates, lends to, and sets the profitability calculus for the banks it oversees, an unavoidable conflict that blurs accountability and jeopardizes independence,” Bessent wrote. “There must also be an honest, independent, nonpartisan review of the entire institution, including monetary policy, regulation, communications, staffing and research.”
After being established in 1913, bank supervision and regulation were not part of the Federal Reserve’s core responsibilities. However, through financial crises such as the Great Depression and Great Recession, the Fed slowly grew in its oversight over the U.S. banking system.
“The ‘extraordinary’ monetary-policy tools unleashed after the 2008 financial crisis have similarly transformed the Federal Reserve’s policy regime, with unpredictable consequences,” added Bessent.
In late July, the Federal Reserve Open Market Committee (FOMC) concluded its July meeting and decided for the fifth consecutive meeting, to hold the federal funds rate steady at 4.25%-4.50%.
“Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated,” said the Fed in a statement to the press. “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.”
The Fed’s decision came after increased pressure from President Trump and members of his administration to drop rates, amid accusations of overspending on renovations to the Federal Reserve headquarters in D.C.
Munch hinges on the FOMC’s next meeting, scheduled for September 16-September 17, to drop rates, amid news released today of a slowdown in the labor market.
The Bureau of Labor Statistics (BLS) reports that U.S. employers added just 22,000 jobs in August, far below most economists’ projections, as the unemployment rate rose to 4.3%—its highest level since October 2021. Job gains in healthcare were offset by losses in federal government, mining, quarrying, oil, and gas extraction.
“With inflation not reaccelerating and job growth fading, the Fed may see this as an opportunity to recalibrate—shifting policy back toward neutral, rather than launching a full pivot to stimulus,” said First American Senior Economist Sam Williamson. “A rate cut in September would mark the first step in that adjustment, and could put downward pressure on long-term yields, offering some relief to prospective home buyers facing elevated mortgage rates and prices. For those still on the sidelines, this could be the opening drive that begins to move the chains on affordability—especially if inventory improves and price growth continues to moderate.”
And as Realtor.com Chief Economist Danielle Hale noted, the overall impact on the housing market may run deeper into the fall, as a dip in mortgage rates may not be enough to lift the market back up to normalcy as overall economic uncertainty looms.
“The labor market is not the only economic area with a shifting balance. Home sales activity and the housing market generally remain stuck as a formerly red-hot sellers’ housing market has balanced,” said Hale. “Homebuyers grapple with a lack of affordability, sellers contend with more competition, and builders deal with lower buyer demand. These conditions haven’t spelled catastrophe, but have created a cruel summer for the housing market in which many are unhappy, each in their own way. Looking ahead, ongoing wage growth is one of three keys needed to restore homebuyer affordability. In fact, research shows that despite the general loss of buying power due to higher mortgage rates nationwide, a handful of metro areas actually saw homebuying power tick modestly higher for the typical household due to exceptional income growth.”
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