Press Clips

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…

Why the U.S. dollar is under threat as the world’s reserve currency

Host David Brancaccio talks with Federal Financial Analytics’ managing partner, Karen Petrou about US Dollar and Reserve Currency

https://www.marketplace.org/story/2025/08/19/threats-to-the-us-dollar-as-the-the-worlds-reserve-currency

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The trouble with Fannie and Freddie

By Sam Sutton

President Donald Trump wants to sell shares in Fannie Mae and Freddie Mac. And if you believe his Truth Social account, he wants to get a deal done before the end of the year. The structure of a Trump-led initial public offering of the housing-finance giants would be enormously consequential to a $9 trillion market for mortgage-backed securities that helps limit costs for American home buyers. And while an IPO could represent a major step toward ending Fannie and Freddie’s 17-year-old federal conservatorship, pulling it off will force the White House to figure out how to make the companies attractive assets for Wall Street without jeopardizing arrangements that are critical to the mortgage market. “It’s a tricky, tricky balancing act,” said Karen Petrou, the managing partner of Federal Financial Analytics. The administration’s plans for the offering are still hazy, but The WSJ’s initial reporting suggests it would value the two mortgage giants at about $500 billion and involve selling 5 percent to 15 percent of their stock. But if Trump is able to make that happen, it could open the door to future offerings that would simultaneously unwind the government’s ownership stake in the GSEs — which may help deficits — and boost the GSEs’ capital. But whether that results in changes to the MBS market is anyone’s guess. “They’ve got a ways to go,” Petrou said. “But the more stock they sell, the more capital they raise.”..

https://www.politico.com/newsletters/morning-money/2025/08/11/the-trouble-with-fannie-and-freddie-00502602…

US Regulators to Play Key Role in Next Crypto, Bank Fight

By Yash Roy

A major battle between crypto firms and traditional lenders over interest and bank charter applications is poised to be decided by regulators appointed by President Donald Trump, who has been a vocal supporter of digital currencies. …“This is an industry that doesn’t think it needs to wait for rules, unlike the banking industry,” said Karen Shaw Petrou, a managing partner of Federal Financial Analytics, where she analyzes financial firms, including lenders. “Stablecoin issuers just go for it and that’s going to unsettle the banks more than probably anything.”..Recently, Circle announced a partnership with Binance for an off-exchange collateral where customers can park their money when they are not making a payment. The largest US crypto exchange, Coinbase, already offers a rewards program for certain consumers, which some in the banking industry argue could potentially be illegal under the no-interest provisions of the Genius Act. Coinbase disagrees, saying the program has been tailored to be in compliance with the law.“The statutory language is vague and has room for exception, but that’s when the fun starts,” Petrou said.

https://www.bloomberg.com/news/articles/2025-08-08/trump-era-regulators-to-play-key-role-in-next-crypto-bank-fight?sref=LTzYu3B0

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How Long Can the Fed’s Independence Last?

By Joe Nocera

As the Federal Reserve board was meeting on Tuesday to make its latest decision about interest rates—amid President Donald Trump’s continuing agitation for them to be lowered—I got on the phone with several of Fed chairman Jerome Powell’s most cogent critics. Critics like Karen Petrou, the highly respected cofounder of the bank advisory firm Federal Financial Analytics, who has long argued that the policies of Powell and his predecessors, Janet Yellen and Ben Bernanke, dramatically increased income inequality. Critics like Mohamed El-Erian, the well-known economist, former CEO of bond investing giant Pimco, and now president of Queens’ College, Cambridge, who warned before just about anyone that Powell was sowing the seeds of inflation by keeping interest rates too low early in his tenure. Critics like Christopher Leonard, whose book The Lords of Easy Money makes the case that the huge bond-buying program begun by Bernanke to get the U.S. through the financial crisis—and inexplicably continued by Powell after the crisis was long over—was little more than a gift to Wall Street that did nothing for the rest of us. In other words, they each believe Powell, as Fed chairman, has made multiple mistakes that have cost the United States a great deal. “If he was the CEO of a company, his performance would have gotten him fired,” El-Erian told me. Yet when I asked each of Powell’s critics if Donald Trump should be able to fire him before …

The stablecoin bill is now law. What’s next for banks?

By   Claire Williams

WASHINGTON — Now that President Donald Trump has signed the stablecoin bill into law, banks are gearing up to lobby regulators as they make rules that could either further threaten or protect banks’ traditional turf.
The stablecoin bill poses both an existential threat and opportunity for bankers, experts say….”The issues on which we’re more focused with our banking clients are really the rules that will be forthcoming about how the nonbank issuers can engage on stablecoin,” said Karen Petrou, co-founder of Federal Financial Analytics. “There certainly is the question of the extent to which a bank holding company or an insurance or subsidiary of an IDI could engage in stablecoins. But the bigger issue from most of our clients is what the marketplace is likely to look like and who’s coming at them.” The Fed is also responsible for a key piece. The stablecoin bill says that master account status for nonbank payment stablecoins maintains the status quo, not explicitly banning nonbanks from access.  “Arguably, the Fed has the authority to open master accounts,” Petrou said. “Now, that’s what the stablecoin issuers believe. Banks say no, and the status quo says ‘back over to you, Fed — you decide.”

https://www.americanbanker.com/news/the-stablecoin-bill-is-now-law-whats-next-for-banks

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