R47377 — Federal Reserve: Policy Issues in the 118th Congress

The responsibilities of the Federal Reserve (Fed) fall into four main categories: monetary policy, regulation of certain banks and other financial firms, provision and oversight of certain payment systems, and lender of last resort. This report summarizes policy issues for Congress in each of these areas, as well as issues surrounding congressional oversight. Monetary policy. The Fed has a statutory mandate of maximum employment and price stability. In normal conditions, the Fed conducts monetary policy by targeting the federal funds rate, a short-term interest rate. The Fed raised short-term interest rates from zero in March 2022 to a range of 5.25%-5.5% in July 2023 in an effort to reduce inflation, which has run well above the Fed’s 2% inflation target since 2021. As inflation has fallen, economists have debated whether reducing interest rates in 2024 would be timely or premature and whether the Fed will be able to orchestrate a “soft landing” that avoids the economy entering a recession. Following economic crises, the Fed has made large scale asset purchases, expanding its balance sheet as an additional monetary policy tool. The balance sheet almost doubled to $8.9 trillion following the COVID-19 pandemic, and now the Fed is gradually reducing its size, with uncertainty about when that process will end. The Fed remits its net income to the Treasury, and higher interest rates have caused its net income to turn negative and its remittances to temporarily fall to zero. Regulation. The Fed regulates bank holding companies, some state-chartered banks, and some U.S. operations of foreign banks. Large banks are subject to enhanced prudential regulation administered by the Fed. Congress is interested in a number of Fed regulatory issues. The failure of Silicon Valley Bank (SVB) in the spring of 2023 raised questions about whether the Fed’s supervision of SVB was deficient and whether reduced regulatory requirements on large banks following the enactment of P.L. 115-174 contributed to its failure. The “Basel III endgame” proposed rule would strengthen capital requirements for large banks. The Fed’s other current regulatory priorities include managing climate risk, the merger approval process, and crypto services offered by banks. H.R. 4763 would allow banks to provide custody services for crypto and other digital assets. S. 2860 would facilitate banking services for cannabis businesses that are in compliance with state laws. Payments. The Fed operates parts of the wholesale payment system in competition with the private sector while also setting risk-management standards for private wholesale payment system operators. In July 2023, the Fed introduced a real-time payment system, FedNow. In the 118th Congress, the House Financial Services Committee has considered legislation to prohibit the Fed from issuing a central bank digital currency or “digital dollar” (H.R. 5403) and to give the Fed jurisdiction over nonbank payment stablecoin issuers (H.R. 4766). Lender of last resort. The Fed was created as a “lender of last resort” to provide liquidity to the banking system during periods of financial instability. The Fed created emergency facilities to support the financial system during the pandemic. Borrowing—and problems with borrowing—by failed banks in 2023 have raised questions about its lender of last resort role. When SVB failed, the Fed created the Bank Term Funding Program to allow banks to access longer-term loans against the book value, as opposed to market value, of their assets. Oversight. The Fed has significant independence from Congress and the Administration to fulfill its duties, but Congress retains oversight responsibilities. The goals of independence and oversight can be in tension, and Congress has grappled with balancing the two through proposals to increase public disclosure and accountability. S. 2190 and H.R. 3556 would require the Fed to provide more information on supervision, and H.R. 3556 would also require the Fed to provide more information on lending programs.

Curated by CRS — every bill listed in this report's relatedMaterials. Edge type cited_in_report, gold confidence.

• HR 5403 — CBDC Anti-Surveillance State Act · 118th Cong
• HR 4766 — Clarity for Payment Stablecoins Act of 2023 · 118th Cong
• HR 4763 — Financial Innovation and Technology for the 21st Century Act · 118th Cong
• HR 3712 — Digital Dollar Pilot Prevention Act · 118th Cong
• HR 3556 — Increasing Financial Regulatory Accountability and Transparency Act · 118th Cong
• HR 3402 — Power of the Mint Act · 118th Cong
• S 2860 — SAFER Banking Act · 118th Cong
• S 2190 — RECOUP Act of 2023 · 118th Cong