Federal Reserve Bank of Atlanta President, Dennis Lockhart, became just one more of the macroeconomists employed by the Federal Reserve and other central banks internationally who tried to explain to the public the tools available to them in solving monetary and fiscal crises.

“The Fed, as the country’s central bank, conducts monetary policy—as distinct from fiscal policy—under legal mandates set down by Congress. The Fed’s mandated policy objectives—the so-called dual mandate—are sustainable economic growth along with low and stable inflation. The mandates have not changed. But what has changed is some aspects of how we pursue those objectives. Extraordinary circumstances this last year and a half have required the Fed to expand the set of tools employed to meet those objectives,” said Lockhart, going on to say, “The principal instrument by which the Fed influences the economy is the federal funds rate (the overnight rate at which banks lend and borrow central bank reserves). The fed funds rate can’t go any lower. As you know, at the Federal Open Market Committee meeting December 16, the federal funds rate target was lowered to a range of 0–25 basis points. [A year ago,] the fed funds rate target was at 425 basis points (or 4.25 percent).”

Clearly, in a position where the Federal Reserve’s primary tool (and, effectively the only tool the general public has observed use of) is maxed out and cannot be adjusted any further, yet Fed. chairman, Ben Bernanke is still saying more needs to be done and the Open Market Committee is still talking about risk to the economy, if the mandate to “restore” the economy’s growth is to be met - other tools need to be put in place.

What tools are these? In reality, beyond the available open market operations which the Federal Reserve performs to control the money supply (and therefore, the interest rates) there are few direct tools available to the Fed, the most used in remaining tools is the insurance of corporate and financial assets. The Federal Reserve, in partnership with other financial management government organizations such as the Federal Depositary Insurance Corporation, may encourage the purchase of risky assets in equally risky times by insuring against losses on some percentage of them.

Another major tool available to the Fed is similar to the Congress-run bailouts - by providing liquidity and fiscal capital to corporations, particularly banks, the Federal Reserve can help insure the economy against further failures - particularly failures in banks which are “too big to fail” to use the term which is used to rationalize the policy.

Some of this is included in the “lender of last resort” functionality of the Federal Reserve and other central banks - that is, the provider of capital to companies who require it (generally overnight) to make clean on their debts and other obligations, when there are no banks or other capitalists available to lend it.

“The Fed has massively expanded the provision of liquidity to financial institutions, thereby easing the broader credit crunch. Serving as lender of last resort is a time-honored function for central banks and is critical in mitigating systemic risk. But in doing so during the current crisis, the Fed has crossed traditional boundaries by extending the maturity of the loans, the range of acceptable collateral, and the range of eligible borrowing institutions. [...] The Fed supported the provision of dollar liquidity beyond our own shores through a vast expansion of its network of swap lines with foreign central banks, raising the size of borrowing lines with existing swap partners and adding additional central banks to the network,” said Janet Yellen, President of the Federal Reserve Bank of San Fransisco in a speech on January 4th.

The final tool which the Federal Reserve has been considering is that of acquisitions - particularly reacquisition of the formerly Federally-mandated Fannie May and Freddie Mac lending institutions. By acquiring these companies, the Fed can directly control their own interest rates, and heavily influence those of competing institutions - in a way which could be beneficial to the economy.

A number of activists, most notably the Republican Ron Paul and more famously Milton Friedman, speak out against the practice of central banking, generally saying that since to reduce lending interest rates the Federal Reserve must inject large amounts of otherwise non-existent capital in to the lending system, any benefit which is seen is lost through inflation. Ricardian equivalence theory would suggest that even if the money did exist, a similar effect would be had.

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