Federal Reserve 101

What America’s central bank does and why it matters

Donald Trump just selected Kevin Warsh as the next chairman of the Federal Reserve Board. It’s an … interesting … pick, since Warsh has been harshly critical of the institution he’s now supposed to run, accusing it of “grave errors” that deserve “opprobrium.” I had a few things to say about Warsh on Friday. But after writing that post I realized that many readers may not have a good understanding of what the Fed does and why it matters, let alone the significance of Warsh’s attacks on the institution. So I’m going to devote this week’s primer to the Fed’s role as America’s central bank, the custodian of its money.

For readers waiting for the final installment of my series on China’s trade surplus, I haven’t forgotten about it. But if a tree falls in the middle of a forest fire, does it make a sound? I want to wait on that piece until a time when its message won’t be drowned out by events. Also, I will write at least one and probably two follow-up posts about the Fed, Next week I’ll take on Warsh’s critique of the Fed’s past policy and what he might try to do. Beyond that, today’s post is limited to a discussion of monetary policy, but the Fed also plays an extremely important role in supervising and regulating banks and other financial institutions. More about that, too, in the future.

Today, I will discuss the following:

1. What the Federal Reserve does

2. Why the Fed matters for the economy

3. The Fed’s objectives and its critics