December 2, 2013

The Fed Is Biting Off More Than It Can Chew

Hester Peirce

Former Senior Research Fellow
Summary

With the full Senate likely voting to confirm her nomination later this month, Janet Yellen is now poised to take over as chair of the Federal Reserve when current chairman Ben Bernanke's term expires on Jan. 31. Unlike most regulators, the Fed chair shows up often enough on television screens and in newspapers to become familiar to Americans far removed from Washington, D.C. From the imposingly tall Paul Volcker to the large-spectacled Alan Greenspan to the current professorially bearded Ben Bernanke, Fed chairmen enjoy their 15 minutes of fame.

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With the full Senate likely voting to confirm her nomination later this month, Janet Yellen is now poised to take over as chair of the Federal Reserve when current chairman Ben Bernanke's term expires on Jan. 31.

Unlike most regulators, the Fed chair shows up often enough on television screens and in newspapers to become familiar to Americans far removed from Washington, D.C. From the imposingly tall Paul Volcker to the large-spectacled Alan Greenspan to the current professorially bearded Ben Bernanke, Fed chairmen enjoy their 15 minutes of fame.

And yet, as significant a role as this person plays in the lives of everyday Americans, the duties of the central-banking wizard are largely shrouded in ambiguity. Given the rapid growth in the Fed's portfolio, the likelihood that the central bank is taking on more than it can handle and the possibility that it will be a source of — not a solution for — financial instability, it's time to look behind the curtain.

Some confusion stems from the fact that the job of the Fed chair has changed over the years, with missions ranging from providing services to banks, to regulating, to setting monetary policy. The latter, whereby the Fed attempts to keep prices stable and unemployment low, gets the most attention. That dual mission, which many believe to be hopelessly broad, sounds pretty impressive in theory, but has not worked well in practice.

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