Recently, the Congressional Research Service published a report titled, “Federal Reserve: Policy Issues in the 119th Congress,” which analyzed policy issues for Congress in each category of the Fed’s responsibilities. The report categorized the Fed’s duties into four primary areas: monetary policy, regulation of banks and financial firms, oversight of interbank payment systems, and its role as a lender of last resort.
Regarding monetary policy, the report detailed the Fed’s statutory mandate to achieve maximum employment and price stability, highlighting its recent actions to manage inflation, which spiked above the Fed’s 2 percent target following the Covid-19 pandemic. The Fed’s strategy for reducing inflation included raising short-term interest rates and gradually reducing its balance sheet, which had expanded significantly due to large-scale asset purchases during the pandemic. The report discussed the challenges of normalizing the balance sheet and the implications of negative net income resulting from higher interest rates on the Fed’s liabilities.
The regulatory section of the report examined the Fed’s oversight of bank holding companies and certain state-chartered banks, with a focus on enhancing regulation for large banks. The report also explored the Fed’s current regulatory priorities, including managing climate risk, conducting large bank stress tests, and determining the level of access that cryptoasset firms should have to the banking system and Fed services.
In the payments domain, the report highlighted the Fed’s operation of key interbank payment systems and the introduction of FedNow, a real-time payment system launched in July 2023. It also discussed the ongoing debate over the issuance of a central bank digital currency, and the Fed’s jurisdiction over payment stablecoin issuers.
Finally, the report addressed the tension between the Fed’s independence and congressional oversight. It noted recent criticisms from political figures and proposals to increase the Fed’s transparency and accountability. The report underscored the challenge for Congress in balancing the Fed’s need for independence with the necessity for oversight and public accountability.
