Federal Reserve: Policy Issues in the 119th Congress

The responsibilities of the Federal Reserve (Fed) fall into four main categories: monetary policy, regulation of certain banks and other financial firms, provision and oversight of certain interbank payment systems, and lender of last resort. This report summarizes issues for Congress in each of these areas, as well as issues surrounding independence and congressional oversight. Monetary policy. The Fed has a statutory mandate of maximum employment and price stability. In normal conditions, the Fed conducts monetary policy by targeting the federal funds rate, a short-term interest rate. The Fed raised short-term interest rates between March 2022 and July 2023 in an effort to reduce inflation, which ran well above the Fed’s 2% inflation target from 2021 to 2023. As inflation has fallen, the Fed began reducing interest rates in September 2024—although inflation has continued to exceed 2%. Following past economic crises, the Fed has made large-scale asset purchases, expanding its balance sheet as an additional monetary policy tool. The balance sheet almost doubled to $8.9 trillion following the COVID-19 pandemic. The Fed then reduced the size of the balance sheet by $2.4 trillion between 2022 and 2025. The balance sheet is now growing again but at a slower pace than when it has been used to respond to crises. The Fed finances its operations primarily with the income earned on these assets and remits its net income to the Treasury. Higher interest rates caused its net income to turn negative for the first time in decades, temporarily halting most remittances to Treasury. An amendment to the Senate’s version of the FY2026 National Defense Authorization Act (S. 2296) that would prohibit the Fed from paying interest on bank reserves was not adopted. Regulation. The Fed regulates bank holding companies, some state-chartered banks, and some U.S. operations of foreign banks. The Fed regulates large bank holding companies under enhanced prudential standards. Under a new vice chair for supervision, the Fed has proposed and finalized regulatory relief for banks through rules, guidance, and revised supervisory practices. These include capital relief for community banks and the largest banks, rescinding climate risk guidance, removing references to reputational risk from guidance, revising the rating system so that fewer large banks are poorly rated, and expanding banks’ ability to engage with crypto. Payments. The Fed operates parts of the wholesale payment system in competition with the private sector while also setting risk-management standards for private wholesale payment system operators. The Fed has been reluctant to give nontraditional payment and crypto firms direct access to its payment system but has proposed offering payment accounts with limited features (sometimes called “skinny master accounts”) to such firms. The House has passed H.R. 1919, H.R. 3633, and H.R. 3838 to prohibit the Fed from issuing a central bank digital currency (or “digital dollar”). Under the GENIUS Act (P.L. 119-27), banks under the Fed’s jurisdiction may issue payment stablecoins. The Fed also serves on the Stablecoin Certification Review Committee. Lender of last resort. The Fed was created as a “lender of last resort” to provide liquidity to the banking system during periods of financial instability. The Fed created emergency facilities to support the financial system during the 2007-2009 financial crisis, the COVID-19 pandemic, and bank failures in 2023. Borrowing—and problems with borrowing—by failed banks in 2023 have raised questions about its role as lender of last resort. Independence. The Fed has significant independence from Congress and the Administration to fulfill its duties, but Congress retains oversight responsibilities. The goals of independence and oversight can be in tension, and Congress has grappled with balancing the two through proposals to increase public disclosure and accountability. President Trump has vocally criticized the Fed’s monetary policy decisions and has attempted to reduce the Fed’s independence and to remove for cause a governor whom he did not appoint. The President will have the opportunity to select a new chair (subject to Senate confirmation) in 2026, and some observers are concerned that he intends to select a chair who will not act independently.