Is Bessent Right About the Fed?

In recent commentaries published by the Wall Street Journal and The International Economy, US Secretary of the Treasury Scott Bessent criticized the US Federal Reserve’s new “gain-of-function” monetary policy, particularly the use of large-scale asset purchases when the policy rate was at the effective lower bound (ELB). By straying from its narrow statutory mandate, he suggests, the Fed put its own independence at risk.

While most observers would say that the Fed has a dual mandate (price stability and maximum employment), Bessent quite rightly refers to “moderate long-term interest rates” as well. Moreover, the Fed also must ensure financial stability – its most important function. Owing to its unique ability to issue monetary liabilities, it is the natural lender of last resort (LOLR) when domestic-currency loans are necessary to prevent default and insolvency of systemically important banks and other financial institutions.

Like any central bank, the Fed is also the natural market maker of last resort (MMLR), purchasing systemically important financial instruments when their markets have become or threaten to become illiquid, disorderly, and dysfunctional. But Bessent does not explicitly acknowledge this function, and in any case, such asset purchases, like LOLR loans, should be reversed when liquidity and orderly financial market conditions have been restored. The Fed should not intervene unless it must.