How the Fed’s Covid-19 Response Undermines Federalism

by Alexander W. Salter
The American Institute for Economic Research

The Federal Reserve’s response to the COVID-19 pandemic has been deeply troubling. Currently totaling $2.3 trillion, the Fed’s interventions include direct lending to large corporations, as well as small- to medium-sized businesses. It is an unprecedented expansion in the kinds of assets the Fed puts on its balance sheet. The central bank is directly allocating resources, which is beyond the rightful limits of monetary policy.

The Fed’s recent actions represent an unnecessary growth of power that significantly expands its presence in credit markets. These actions also increase the risk that the Fed will lose its political independence. Since the Fed is engaging in de facto fiscal policy, Congress could try to strong-arm it into pursuing political goals that cannot be achieved through the budgeting process.

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