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Why isn't the Fed doing its job?

John H Cochrane
John H Cochrane1/20/2022 11:22 PM GMT+08  • 6 min read
Why isn't the Fed doing its job?
The Fed should be held to account for how badly it is doing on the basic task of protecting the financial system, says Cochrane.
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The nomination of new members to the US Federal Reserve Board offers an opportunity for Americans — and Congress — to reflect on the world’s most important central bank and where it is going.

The obvious question to ask first is how the Fed blew its main mandate, which is to ensure price stability. That the Fed was totally surprised by today’s inflation indicates a fundamental failure. Surely, some institutional soul searching is called for.

Yet, while interest-rate policies get headlines, the Fed is now most consequential as a financial regulator. Another big question, then, is whether it will use its awesome power to advance climate or social policies. For example, it could deny credit to fossil-fuel companies, demand that banks lend only to companies with certified net-zero emissions plans or steer credit to favoured alternatives. It also could decide that it will start regulating explicitly in the name of equality or racial justice, by telling banks where and to whom to lend, whom to hire and fire, and so forth.

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