Arezou

The Fed’s New “Gain-of-Function” Monetary Policy

By Scott Bessent

Overuse of nonstandard policies, mission creep, and institutional bloat are threatening the central bank’s monetary independence….In her book Engine of Inequality: The Fed and the Future of Wealth in America (2021), progressive financial policy expert Karen Petrou documents how the Fed’s pursuit of a “wealth effect” to stimulate the economy backfired. “Unprecedented inequality,” wrote Petrou, “is clear proof that the wealth effect is all too effective for the wealthy, but an accelerant to economic hardship for everyone else.” Economists’ focus on the supposed benefits of the wealth effect is particularly odd given that the Fed’s asset purchases act more powerfully on the discount rate at which assets are valued than the stream of cash flows that underpins the asset’s price. Asset owners are less likely to bring forward consumption as a result of changes in the discount rate than income growth, and to the extent that they do increase consumption, the effects may reverse once discount rates are normalized. In Petrou’s view, the exacerbation of income and wealth inequality is a function of the distribution of assets in the United States—which the Fed should take as a given. Only the very wealthiest individuals own financial assets that are most directly impacted by the Fed’s large-scale asset purchases. Moving down the spectrum, a substantial portion of the middle of the income distribution has exposure to home equity, but this asset is less sensitive to the Fed’s financial market machinations. The …

The Fed’s ‘Gain of Function’ Monetary Policy

By Scott Bessent

As we saw during the Covid pandemic, lab-created experiments can wreak havoc when they escape their confines. Once released, they can’t easily be put back. The “extraordinary” monetary-policy tools unleashed after the 2008 financial crisis have similarly transformed the Federal Reserve’s policy regime, with unpredictable consequences. The Fed’s new operating model is effectively a gain-of-function monetary policy experiment. 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….By failing to deliver on its inflation mandate, the Fed allowed class and generational disparities to widen. Its pursuit of a wealth effect to stimulate growth backfired. “Unprecedented inequality is clear proof that the wealth effect is all too effective for the wealthy, but an accelerant to economic hardship for everyone else,” financial analyst Karen Petrou wrote in her book “Engine of Inequality” (2021). The Fed’s growing footprint has profound implications for independence. By extending its remit into areas traditionally reserved for fiscal authorities, the Fed has blurred the lines between monetary and fiscal policy.

https://www.wsj.com/opinion/the-feds-gain-of-function-monetary-policy-ac0dc38a?mod=commentary_article_pos1…

Trump wants to shake up the Fed. Stephen Miran has a playbook

By Sam Sutton

White House economic adviser Stephen Miran is one of Donald Trump’s chief strategists for scaling back the Federal Reserve’s autonomy. The president is giving him a shot at disrupting the central bank from the inside. The Harvard-trained economist, tapped by Trump for a Fed board seat, has proposed measures that would allow the president to fire Fed governors at will. He wants to end the inflation targeting that anchors expectations for prices and has slammed the “wildly inappropriate” purchases of Treasury debt during economic expansions….“Miran would have little difficulty reflecting the president’s views,” said Karen Petrou, the managing partner of Federal Financial Analytics. The proposals he has crafted would create “a far more political central bank.” Critics of Trump’s moves are concerned that a more political Fed would make interest rate decisions based on near-term considerations to aid the economy rather than in the long-term interest of price stability….“There’s a lot that needs to be shaken up,” Petrou said. In that regard, “Miran is certainly the guy to do it.”

https://www.politico.com/news/2025/08/29/trump-fed-shake-up-stephen-miran-00534615

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Trump, Pulte weaponizing housing finance for political ends, experts say

By Andrea Riquire

“The president has just made us a higher-risk country”

Host David Brancaccio talks with Karen Petrou at Federal Financial Analytics after President Donald Trump moved to fire Federal Reserve Governor Lisa Cook last evening. That’s Petrou’s conclusion “The president has just made us a higher-risk country”

https://www.marketplace.org/episode/2025/08/26/the-president-has-just-made-us-a-higherrisk-country…