Fed’s Challenges Go Beyond When to Raise Rates
By Karen Shaw Petrou
As markets have focused monomaniacally on the Federal Market Open Committee, the Federal Reserve System held two little-noticed conferences recently in which every important senior Fed official participated because of the gravity of the events’ topics. Together, the two highly relevant sessions – one focused on financial stability and the other on monetary policy – prompt this provocative question: Does the Fed even matter?  One conference looked at whether the Fed’s vaunted macroprudential regulation – a bedrock reform designed to avert crises – is functional. The other targeted an equally critical and even more immediate concern: whether the Fed can still transmit its monetary policy edicts because financial markets have changed so profoundly so fast. Both of these questions arise because big commercial banks just aren’t what they used to be, with nonbanks increasingly taking over market share. The latest global data show systemic-sized nonbanks now control $14.2 trillion in U.S. assets – and that’s a walloping underestimate because it leaves out the government-sponsored enterprises and critical nonbank functions such as the payment system.  If the Fed can’t ensure financial stability or set monetary policy, then what good is it? We need a functional Fed, but that means the Fed must quickly reckon with the new financial market created in large part by its own rules.