There are two dominant ways the U.S. fights economic hardship. The first is through the monetary policy of the Federal Reserve (commonly abbreviated as “the Fed”) and the second through fiscal policy, where Congress passes laws to be signed or vetoed by the president. Both approaches target unemployment and inflation.
Since the 2007-2008 financial crisis, the government has been largely unable to pass legislation that can be reasonably defined as expansionary (one of three fiscal policy approaches, the others being neutral and contractionary). Expansionary fiscal policy is achieved through cutting taxes and increasing government spending. Aside from the initial stimulus passed in January 2009, all new spending has been accompanied by tax revenue with an overall decrease in government spending.
This has allowed the Fed to step in as the predominate force in fighting the threat of recession since 2008. The Fed has pursued expansionary policy by both keeping interest rates low and utilizing quantitative easing, a process in which the Fed buys financial assets from private institutions and commercial banks.
In October 2014, the Fed stopped quantitative easing, as the economy showed critical signs of recovery. As projections show unemployment continuing to fall and GDP increasing by 3 percent, there are clear signs the Fed will begin to slowly raise the key interest rate to 1 percent for the first time since 2008. This is expected to be done very gradually, adding 0.25 percent each quarter.
Another key change from the Fed is a change to a key provision of the 2010 financial reform law, Dodd-Frank. The change weakens the Volcker rule, allowing investment banks that are federally backed to remain invested in hedge and private equity funds until at least 2017 (and possibly 2022).
These changes come under the leadership of Chairwoman Janet Yellen, who assumed office in February, replacing outgoing Bush and Obama appointee Ben Bernanke. Yellen was previously on the Board of Economic Advisors for President Bill Clinton and went on to be President of the San Francisco Federal Reserve Bank. Yellen’s husband is a Nobel Prize winning economist. Yellen has remained largely above criticism from both political parties and relatively out of the spotlight.
The Fed has been instrumental in keeping the tenuous economic recovery going, but now that the economy is beginning to pick up the Fed will write the rest of its history in the Obama era.