When congress passed the Federal Reserve Act in 1913, they established our nation’s independent central bank, and outlined the purpose of the bank. Section 2A of the act sets this purpose:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
This section outlines what economists call the “dual mandate” of the Fed: a balance between price stability (i.e., inflationary control) and full employment. When one is out of balance, the Fed will act to adjust monetary policy in order to restore the balance. For example, in 2009, when the U.S. was experiencing the worst economic cycle in nearly a decade, unemployment hit nearly 10%. The Federal Reserve used the policy tool known as Quantitative Easing to increase the money supply and lower interest rates, with the goal being for businesses to invest money in production and hire more workers.
The risk to this strategy is that the Fed may actually take a step too large for the economy to handle. The U.S. economy has been compared to a large ship, and monetary policy is the steering wheel. The ship turns very slowly and has a lot of momentum; by the time you know you’ve turned the wheel too far, it can be too late to do anything about it. There are many opinions as to how well the Fed Chairman Ben Bernanke is steering the ship. I would be curious to hear yours.
By Peter LaTona, Vice President of Sales at APMEX
Balance your portfolio with the 4th asset class of Gold today.
Keep up with APMEX news throughout the week with subscriptions to the