Fed's Expanded Role: Understanding the Shift in Monetary Policy

The Federal Reserve's role in shaping the economy and financial markets has evolved significantly since the 2008 crisis. The institution, created in 1913 as a lender of last resort, now uses its balance sheet to influence asset prices and interest rates.

Before 2008, the Fed's primary tool was setting the federal funds rate, but after the crisis it began purchasing mortgage-backed securities, Treasuries, corporate credit, and other assets through quantitative easing. This expanded the Fed's toolkit and enabled it to hold a significant portion of the economy in its sway.

The new balance sheet has had far-reaching consequences for clients' portfolios. The Fed's actions have pushed up asset prices, benefiting borrowers and owners at the expense of savers holding cash. Advisors who understand the Fed's expanded role can better position their clients' portfolios to manage these risks.