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Has the Federal Reserve Been a Success?
Luke Skywalker
Helms School of Government, Liberty University
PPOG502: Economics and Public Policy (C01)
Dr. Timothy Terrell
4 April 2025
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Abstract
This paper explores various aspects of the Federal Reserve, including its purpose, organization,
and structure, encompassing the Board of Governors (BOG), the Federal Open Market
Committee (FMOC), and the 12 Federal Reserve Banks. It delves into the authorities and
oversight mechanisms in place, as well as the market impact of the
Federal Reserve. Key historical events such as the stagflation of the 1970s and the
1977 amendment to the Federal Reserve Act, the Great Recession of 2008, and the COVID-19
pandemic and its aftermath will be examined to understand the Fed's role and effectiveness
during these periods.
In consideration of the dynamic nature of the global economy and financial markets, the
issue of potential reforms to the Federal Reserve System remains relevant. As the Fed continues
to play a pivotal role in shaping the nation's economic framework, discussions regarding its
authority, oversight, and influence are crucial not only from a historical perspective but also in
terms of current and future considerations.
Has the Federal Reserve Been a Success?
The United States Federal Reserve System, established on December 23, 1913, when
President Woodrow Wilson signed the Federal Reserve Act into law, serves as the central bank
of the United States. (About the Fed, 2016). Its primary mission is to provide the nation with a
safe, flexible, and stable monetary and financial system. Over the decades, the Federal Reserve,
commonly referred to as the Fed, has operated with considerable autonomy, executing its
duties with minimal oversight. This independence has led many Americans to trust that the Fed
acts in their best interests. However, this trust may not always be warranted, and it is crucial to
reassess the extent of the latitude granted to this influential entity within the financial industry.
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This paper will explore various aspects of the Federal Reserve, including its purpose,
organization, and structure, encompassing the Board of Governors (BOG), the Federal Open
Market Committee (FMOC), and the 12 Federal Reserve Banks. It will delve into the authorities
and oversight mechanisms in place, as well as the market impact of the Federal Reserve. Key
historical events such as the stagflation of the
1970s and the 1977 amendment to the Federal Reserve Act, the Great Recession of 2008, and
the COVID-19 pandemic and its aftermath will be examined to understand the Fed's role and
effectiveness during these periods. Additionally, we will discuss the employment impacts of the
Federal Reserve's policies and compare the Fed's performance with other developed nations'
central banks, including the Bank of England, the Bank of Japan, and the Euro system.
In consideration of the dynamic nature of the global economy and financial markets, the issue
of potential reforms to the Federal Reserve System remains relevant.
As the Fed continues to play a pivotal role in shaping the nation's economic framework,
discussions regarding its authority, oversight, and influence are crucial not only from a historical
perspective but also in terms of current and future considerations.
The Federal Reserve
Organization and Structure
Structurally, the Federal Reserve System is unique among central banks globally. It is
composed of three key entities: the Board of Governors, located in Washington, D.C.; the 12
regional Federal Reserve Banks, spread across the country; and the Federal Open Market
Committee. This decentralized design was intentional, aiming to balance public and private
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interests, as well as regional and national concerns, in the oversight and execution of monetary
policy. (About the Fed, 2016).
The Board of Governors is comprised of seven members who are nominated by the
President of the United States and must be confirmed by the Senate in order to fulfill their 14-
year term. (About the Fed, 2016). Additionally, the President will nominate a Chair and Vice
Chair of the Board from the existing members of the BOG; that status comes with a four-year
term and has no additional impact on the members existing 14year term.
It was decided to carve up the United States into 12 federal financial districts, with each
one supported by a Federal Reserve Bank. The banks, listed in order from 1 to 12 by the district
they are assigned to, are situated in: Boston, New York City, Philadelphia, Cleveland, Richmond,
Atlanta, Chicago, St. Louis, Minneapolis, Kansas
City, Dallas, and San Francisco.
The Federal Open Market Committee has a unique makeup, as its membership consists
of the seven members of the BOG; the president of the Federal Reserve Bank of New York; and
four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating
basis. Those eleven banks are broken into four groups: Boston, Philadelphia, and Richmond
constitute Group 1; Group 2 includes Cleveland and Chicago; Atlanta, St. Louis, and Dallas sum
up Group 3; and Group 4 consists of Minneapolis, Kansas City, and San Francisco. Nonvoting
Reserve Bank presidents attend the meetings of the FOMC, participate in the discussions, and
contribute to the Committee's assessment of the economy and policy options. (About the Fed,
2016). The Federal Reserve Bank of New York is allowed the privilege of holding a permanent
seat on the FOMC due to its geographic location being near the center of the financial world;
New York City is home to one of the oldest stock exchanges in United States and the largest, by
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total market capitalization, the New York Stock Exchange (NYSE). Additionally, numerous other
banks, brokerages, and other financial institutions are headquartered in New York. The Federal
Reserve Bank of New York's proximity within the central hub of the United States' financial
district enables it to keep a pulse on the nation’s economic activities and trends.
Purpose of the Federal Reserve
While the Fed has five general functions, there is more emphasis on the dual mandate of
price stability and maximum employment. The other functions include moderating long-term
interest rates; minimizing and containing systemic risks to the financial system; promoting and
monitoring the safety and soundness of individual financial institutions; promoting community
development and consumer protection; and fostering payment and settlement system safety
and efficiency. (About the Fed, 2016).
The Fed executes these functions utilizing tools such as open market operations (OMOs),
the discount rate, and reserve requirements. Before the Great Recession of late 2007 to mid-
2009, Open Market Operations consisted primarily of buying and selling Treasury bills from
other banks. This increased the amount of liquid capital that was available for use in the
economy. The FOMC would adjust the federal funds rate, which is the rate commercial banks
would charge each other to borrow those surplus assets overnight, up or down depending on
the current economic situation. After the Great Recession, the Fed shifted to the use of other
tools such as Quantitative Easing,
Interest on Reserves, and Reverse Purchase Agreements, also known as REPOs.
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Authorities and Oversight
Over the past 113 years since the Federal Reserve Act was signed into law by President
Woodrow Wilson, the Fed’s authorization and oversight has been impacted by over 20 major
pieces of legislation. Some of the more significant laws include the
Depository Institutions Deregulation and Monetary Control Act of 1980 and the DoddFrank Wall
Street Reform and Consumer Protection Act of 2010. The Accounting and Auditing Act of 1950
provided the Government Accounting Office with limited audit authority over the Federal
Reserve itself.
The title of the Depository Institutions Deregulation and Monetary Control Act of 1980
highlights two primary objectives of that legislation: the deregulation of depositaccepting
institutions and the enhancement of monetary policy control by the Federal
Reserve. (Robinson, 2013). The noted former Chairman of the Federal Reserve, Paul Volker,
stated that Title I and II of the Depository Institutions Deregulation and Monetary Control Act of
1980 “will undoubtedly take their place among the most important pieces of financial
legislation enacted in this century” (Volker, 1980). For everyday consumers, one of the most
important safety measures was the expansion of the federal deposit insurance coverage from
$40,000 to $100,000. Coupled with authorization for banks to provide automatic transfer
services from checking to savings accounts, the average American citizen could now breathe a
sigh of relief that their money was indeed safe and accessible at certified financial institutions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed
into law on July 21, 2010, by then President Barack Obama. His remarks that the “financial
sector was governed by antiquated and poorly enforced rules that allowed some to game the
system and take risks that endangered the entire economy” underscored the sentiment that
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many American citizens came to vocalize after the analysis of the root causes of the Great
Recession. In order to prevent taxpayers from bearing the cost of financial failures, the Dodd-
Frank Act established the Orderly Liquidation Authority for collapsing firms, thereby reducing
the impact of their failure on the economy. The Orderly Liquidation Authority allows the
government to take control of a “too big to fail” firm that is on the verge of collapse. That firm is
then placed into a receivership that is managed by the Federal Deposit Insurance Corporation so
its operations can be shut down without negatively impacting the entire financial system.
(Goodwin, 2010).
As the Federal Reserve is managed by the Board of Governors, the BOG is subject to
report to Congress twice a year. Normally, this occurs when the Chairman of the Board of
Governors appears once before the Senate Committee of Banking and
Currency and once before the House Committee on Financial Services. Various other
Congressional committees may call upon any members of the BOG to testify and the FMOC
routinely holds a press conference after each of the eight annual meetings to share comments,
take questions, and provide transparency to the American public on the inner workings of the
Federal Reserve.
Market Impact of the Federal Reserve
Stagflation and the Federal Reserve Reform Act of 1977
In 1971, then President Richard Nixon ended the gold standard for the United States and
implemented wage/price controls. His intentions were to head off the imminent gold run and
address the rising problem of inflation. President Nixon’s efforts, and the exasperating financial
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conditions of other major nations around the world, lead to a period of both slow growth and
inflation, or what came to be known as stagflation.
In 1970, the incoming Chairman of the Board of Governors, Arthur Burns, believed
“tightening monetary policy and the increase in unemployment that accompanied it would be
ineffective against the inflation then occurring, because it stemmed from forces beyond the
control of the Fed, such as labor unions, food and energy shortages, and OPEC’s control of oil
prices” (Ghizoni, 2013). Despite this belief,
Burns went along with fourteen other economic advisors at Camp David to confer with
President Nixon. It was after this session that President Nixon announced a new economic
policy that would include the closing of the gold window. It was later propositioned that a
“substantial part the Great Stagflation of the 1970s could have been avoided, had the Fed not
permitted major monetary expansions in the early 1970.” (Selgin et al., 2012). With the
abandonment of the gold standard and stagflation running rampant throughout most of the
1970s, Congress decided to take action and passed the Federal Reserve Reform Act of 1977. In
doing so, the original act that created the Federal Reserve was amended to direct the Fed to
“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 the goals of maximum
employment, stable prices, and moderate long-term interest rates.” It also “required Reserve
Bank directors to represent the interests of agriculture, commerce, industry, services, labor, and
consumers” and addressed potential conflicts of interest by “prohibiting Federal Reserve
directors, officers, and employees from participating in any matters that affect their own
financial interests.” (Zhu, 2013). Another element of the 1977 Act was the codification of the
twice annual meeting before Congress by the BOG to discuss the “Federal Reserve’s and Federal
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Open Market Committee’s objectives, performance, and plans in regards to the growth or
diminution of monetary and credit aggregates for the upcoming twelve months.” (Zhu, 2013).
The multitude of checks and balances placed upon the Federal Reserve by Congress are
indicative of the will of the people as they strived to increase transparency from their
government agencies.
The Great Recession (2007-2009)
While there is some debate about the root cause of the Great Recession, one of the key
factors that everyone agrees on is the lack of regulation on financial institutions concerning
their practices in mortgage-backed securities (MBS) and collateralized debt obligations (CDO).
The housing market had swelled from the demand caused by the Fed lowering interest rates
during the early 2000s. This led to a significant boost in economic growth and reduced
unemployment. However, the banks allowed people with risky credit histories to take on large
home loans using adjustable-rate mortgages (ARMs). These ARMs had low introduction rates
that lulled people into a false sense of security that they could afford the payments now
without considering how high the payments would be in the future when the higher rate kicked
in.
This kicked off the beginning of the end as more and more mortgages went into default
and banks that were too big to fail began to fail, so did investment institutions that were tied up
in the MBS and CDO markets. Thomas Hoenig, then President of the Federal Reserve Bank of
Kansas City, stated in a speech to Women in Housing and Finance, “The five largest investment
banks failed, were forced into mergers, or had to convert to bank holding company ownership
to gain the necessary support. Bank of
America and CitiGroup both required extensive assistance to pull through this crisis.
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Special assistance was provided to AIG, the largest insurance company in the United States. In
addition, Fannie Mae and Freddie Mac belong in this group because of the influence they exert
over the U.S. mortgage market, their enormous losses, and public takeover.” (Hoenig, 2011). As
a point of emphasis, he also stated that “central banks must pursue policies that preserve
financial stability”, which could be interpreted to mean that the Federal Reserve did not utilize
effective policies prior to the housing bubble burst.
COVID-19 and post COVID-19
As of March 6, 2025, there have been 1,222,603 American deaths from COVID-19; some
believe that number is actually much higher. According to data from the World Health
Organization (WHO), more than 7 million people around the globe have died from COVID-19.
(Kekatos, 2025). Businesses began shuttering, people were out of work, and the economies of
the world came to a screeching halt as everyone began to hunker down in their homes to stop
the spread of this infectious disease. The Fed acted and began a series of federal fund rate
reductions that eventually dropped to near zero. To ensure liquidity in financial markets, the Fed
began purchasing United
States Treasury securities and mortgage-backed securities in large-scale quantities. They also
introduced lending programs to support households, employers, and state and local
governments. So as to not repeat past mistakes, the FOMC provided clear communication that
its monetary policy was intended to help stabilize the market.
Conclusion
In conclusion, the Federal Reserve has played a pivotal role in shaping the economic
landscape of the United States since its establishment in 1913. Through its various functions,
including price stability and maximum employment, the Fed has navigated numerous economic
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challenges, from the stagflation of the 1970s to the Great Recession of 2008 and the COVID-19
pandemic. While its actions have often been met with scrutiny and debate, the Federal
Reserve's ability to adapt and implement policies aimed at stabilizing the economy underscores
its significance. The ongoing discussions about potential reforms highlight the need for
continuous evaluation of its authority and oversight to ensure it remains effective in a dynamic
global economy. As we look to the future, the Federal Reserve's role will undoubtedly continue
to be crucial in maintaining economic stability and fostering growth. “Has the
Fed been a success?” is truly a question that cannot be effectively answered. Success is
measured in the eye of the beholder; it does not always mean the same thing to everyone.
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