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Q&A on the Federal Reserve

January 17, 2014
Senator Chuck Grassley , Dysart Reporter

Q: What does the Federal Reserve do?

A: The Fed was created to stem fault lines in the financial system that many argued bred depositor runs, interest rate spikes and market speculation in the late 19th and early 20th centuries. The case was made in Congress that the ebb and flow of a growing U.S. economy needed more certainty and that a system was needed to manage money and the flow of credit. The law that created the Fed - the Federal Reserve Act of 1913 - established staggered terms for presidential appointees to serve on the Board of Governors who also required a congressional green light of approval via the advice and consent of the U.S. Senate. Today appointees serve 14-year terms intended to help insulate monetary policymaking from politics. Unlike the centralized banking systems of its international counterparts, the Federal Reserve System established a dozen regional banks known as the Federal Reserve District Banks to serve and reflect the diversity of each respective region. Today they are located in the 12 original cities selected a century ago, including Boston (District 1), New York (District 2), Philadelphia (District 3), Cleveland (District 4), Richmond (District 5), Atlanta (District 6), Chicago (District 7), St. Louis (District 8), Minneapolis (District 9), Kansas City (District 10), Dallas (District 11), and San Francisco (District 12). The Board of Governors and the Reserve Bank presidents meet eight times per year. The Fed will launch its centennial year under new leadership with the Senate's approval in January of Janet Yellen to serve as the 15th executive at the helm of the seven-member Board of Governors of the Federal Reserve System. For the last 100 years, the Fed's primary responsibilities have included setting monetary policy, supervising the soundness of financial institutions and providing payment services to banks. I've worked to require increased transparency of Fed activities and sponsored legislation to allow independent audits of the Federal Reserve by the Government Accountability Office, which is the investigative arm of Congress, and require that meaningful information about Federal Reserve operations be disclosed to Congress.

Q: How does the Federal Reserve impact Americans?

A: As the saying goes, money makes the world go round. The Fed sets monetary policy that influences the supply and cost of credit. As people go about their daily lives, from paying bills, buying goods and services, cashing or depositing checks or taking out a car or home loan, the policies set by the Federal Reserve affect these basic transactions and influence consumer behavior and decisions on whether to save, spend or invest. The Fed provides financial services such as providing banks with currency and coin; moving money electronically between banks; and maintaining the U.S. Treasury's account, including processing electronic payments, such as Social Security checks. In 2012 the Fed processed $4.2 trillion in payments per day. By managing the money supply and influencing interest rates, the Fed plays a policymaking role to curb inflation, boost consumer confidence and trigger commercial activity. Whereas the Federal Reserve manages the supply and demand of money, Congress sets the nation's fiscal policy through tax and spending policies that play a hand in consumer confidence, saving and investment up and down Main Street. I'm committed to lowering the tax burden so the American public and job creators can keep more of their hard-earned money to save, spend, hire and invest as they see fit.

Q: Why did you vote against Janet Yellen's nomination to chair the Federal Reserve?

A: Under the leadership of Chairman Ben Bernanke, the Fed has flooded the economy with trillions of dollars since the economic recession hit in 2008. Through an unconventional policy of buying mortgage-backed securities and longer-term Treasury securities, the Fed has created an addiction to easy money by Wall Street. With significant uncertainty surrounding the Fed's ability to wind down $4 trillion of accumulated assets, it risks repeating the mistakes of the past. The easy money policies of the late 1970s and early 1980s led to a painful recovery with interest rates reaching as high as 20 percent. No one wants a flashback to this period of hyperinflation and high unemployment, least of all Main Street. In fact, the Fed's so-called tool of quantitative easing hasn't buoyed Main Street's prognosis for long-term growth and stability. Consider that unemployment remains too high, bank lending remains too tight and savers today are too often discouraged. My concerns about the Fed's easy money policies and inflation led me to vote against Chairman Bernanke for his second term at the Fed. Based on her statements, it seems that Janet Yellen will continue to pursue these misguided policies, and I couldn't in good conscience vote for her confirmation. History shows the inflationary risks of easy money can do more harm than good. This is a watershed moment for the Fed. Continuing an open-ended monetary expansion policy may capsize the recovery by creating an economic bubble or even hyperinflation. We need a chairman focused on a strong dollar and low inflation.



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