What's Happening?
Treasury Secretary Scott Bessent has called for the Federal Reserve to be relieved of its duties regulating the nation's banks. In an essay published in the Wall Street Journal, Bessent argues that the central bank has deviated from its core mission of promoting full employment, stable prices, and moderate long-term interest rates. He contends that the Fed's involvement in banking regulation creates conflicts that compromise its independence and accountability. Bessent suggests an independent, nonpartisan review of the Fed's entire institution, including its monetary policy, regulation, communications, staffing, and research. Historically, the Fed's role in bank supervision and regulation has expanded over time, particularly during financial crises like the Great Depression and Great Recession. Currently, bank supervision and regulation are shared among the Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
Why It's Important?
The proposal to limit the Federal Reserve's role in banking regulation could have significant implications for the U.S. financial system. If implemented, it may alter the balance of power among federal agencies responsible for financial oversight, potentially affecting the stability and soundness of the banking sector. Advocates for the Fed argue that its regulatory role is crucial for maintaining financial stability, which is interconnected with the broader economy. Changes to the Fed's functions could impact its ability to respond to economic crises and influence monetary policy. The debate over the Fed's role reflects broader discussions about the independence and accountability of financial institutions and their impact on economic policy.
What's Next?
It remains unclear who would conduct the proposed review of the Federal Reserve and what it would entail. Bessent has encouraged Fed Chair Jerome Powell to initiate an internal review before any external assessment. Powell has indicated that any changes to the Fed's functions or structure are ultimately up to Congress. The ongoing discussion may lead to legislative proposals or further debate among policymakers about the appropriate scope of the Fed's regulatory responsibilities.
