Fed, Treasury Clarify Fed’s Role

As the Federal Reserve and Treasury work closely to restore stability to the financial system in the midst of a prolonged recession, the pair of institutions issued a joint declaration of broad points that they agree on.

The statement comes as both agencies work together to help mitigate the effects of the current economic recession which officially began in December of 2007.

The following is a summary of their four joint points

1. The Fed will use “all its tools” and work closely with Treasury and other agencies to improve the functioning of credit markets, prevent failure of institutions which leads to systemic damage, and foster stabilization and repair of the financial system.

2. The Fed will aim to improve financial or credit conditions broadly, not allocate credit to narrowly-defined sectors or classes of borrowers. Fiscal authorities will make decisions about allocation of credit.

3. Fed loans or securities purchases must not constrain the Fed’s exercise of monetary policy as needed to foster maximum sustainable employment and price stability. The Treasury and Fed stated they are seeking laws which would give the Fed additional tools to “sterilize” its supply of bank reserves from the effects of its lending or securities purchases.

4. The Treasury and Fed seek a framework to allow the government to deal at an early stage with the potential failure of any systemically critical financial institution. This framework should detail the expected role of the Federal Reserve.