As the US central banking system, the Federal Reserve plays a crucial role in its economy. However, its role has become even more significant over time, as it has adopted a more active economic policy. Now, the Fed has a larger balance sheet and a broader range of objectives and tools that give it more control over financial processes (Levy 2). Such evolvement of the Fed’s role has also affected US businesses.
Being an important part of the US economic system, the Fed inevitably influences its other agents and elements and its increased activist policy tangible consequences. According to Levy, the enlarged use of the Fed’s balance sheet has led to its heightened involvement in financial markets (4). It revealed new challenges for the Fed and US economy. While presenting the Quantitative Easing 3 (QE3) monetary policy in 2012, Fed Chairman Bernanke claimed it would help stimulate economic growth by raising asset prices and encouraging risk-taking (Levy 4).
However, the results of this policy did not fulfill the expectations: it had little effect on the nominal GDP and did not stabilize the monetary policy as quickly as it was predicted (Levy 4). As Plosser noted, the use of an enlarged balance sheet is too complex and is accompanied by unnecessary economic and political risks (qtd. in Levy 4). Thus, the Fed’s influence on the financial markets is increased with its expanded tools and objectives, and any mistake on its part may pose a threat to the economy.
Certainly, the heightened Fed’s role affects all the financial market participants, including businesses. They pay increased attention to the Fed’s enlarged forward guidance and frequent public commentary and make decisions based on them (Levy 6-7). They assume the central bank has more relevant data, but Levy emphasizes that the only real “inside” information is the Fed’s plans concerning the monetary policy (6-7). The economist suggests that the Fed’s guidance should be more specific and focused on the issues within their control and stated objectives (Levy 7). Then, the businesses would not be confused, and the Fed’s guidance would more positively impact businesses and economic growth in general.
Levy, Mickey D. “The Fed and Financial Markets: Suggestions to Improve an Unhealthy Relationship.” Strategies For Monetary Policy: A Policy Conference, Hoover Institution, 2019.