It’s certainly not the most destructive myth in the USA (this is), but definitely one of the more pervasive ones – this idea that the Fed is entirely independent of the US government. But a new paper from the NY Fed sheds light on what they call a “symbiotic relationship”. A close look at the management of government funds during the financial crisis shows that this debate about independence is largely semantics. Operationally, the Fed is very much an agent of the government or as I often like to say – the other pocket in the same pair of pants as the US Treasury. But don’t take it from me. Take it from the Fed officials themselves:
“The U.S. Treasury and the Federal Reserve System have long enjoyed a close relationship, each helping the other to carry out certain statutory responsibilities. This relationship proved beneﬁ cial during the 2008-09 ﬁ nancial crisis, when the Treasury altered its cash management practices to facilitate the Fed’s dramatic expansion of credit to banks, primary dealers, and foreign central banks.
…Understanding the relationship between Federal Reserve credit policy and Treasury cash management is important because the relationship illuminates an important but sometimes unappreciated interface between the Treasury and the Fed. It also underscores the symbiotic relationship between the two institutions, in which each assists the other in fulﬁlling its statutory responsibilities.”
MMR views the world in a similar light. As an agent of the US government the Fed is essentially a partner in helping the US government achieves its objectives. In this regard it is very much a part of the US government. There’s no point denying it. Even the Fed knows this relationship is symbiotic and they’re explicit about it….