The Fed Is Not As Powerful As We Think

This past week marked the annual gathering of bankers, financial officials, and other economic experts hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming. On Friday, Fed Chair Janet Yellen and European Central Bank head Mario Draghi both spoke; in a slow week for the markets, these speeches received the bulk of the econ media’s attention, and Yellen’s remarks were heralded for days as the week’s major financial event.


Zachary Karabell is an author, money manager, and commentator. His most recent book is The Leading Indicators: A Short History of the Numbers That Rule Our World.

This emphasis on the utterances of the Fed chair is only one aspect of a deification of the Fed and whoever heads it. The elevation of the Fed chair to current heights is not benign. It fosters an unhealthy dependency and excuses policymakers and market participants from making their own judgments, as well as their own mistakes.

More problematic, however, was the topic of Yellen’s speech: the labor market. Don’t get me wrong. The labor market is a crucial economic topic. But the notion that the Fed should be responsible for the labor market is both new and flawed. The so-called “dual mandate” of the Fed is to focus on price stability and on employment. But the idea that the Fed can do much to affect employment is, at the very least, questionable.

The pronouncements of the chair of the Federal Reserve now occupy a special place in the financial ecosystem. The Fed chair regularly appears before Congress to give an assessment of the economy, and these appearances receive considerably more attention in media and financial circles than equivalent briefings by the Treasury secretary, let alone the chairpersons of the National Economic Council or the Council of Economic Advisers.

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