Federal Reserve: Policy Issues in the 119th Congress
Congressional research reportJan 14, 2026
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Federal Reserve: Policy Issues in the 119th
Congress
Updated January 14, 2026
Congressional Research Service
https://crsreports.congress.gov
R48390
SUMMARY
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.
R48390
January 14, 2026
Marc Labonte
Specialist in
Macroeconomic Policy
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.
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Federal Reserve: Policy Issues in the 119th Congress
Contents
Introduction ..................................................................................................................................... 1
Organizational Structure of the Fed .......................................................................................... 1
Fed Independence and Congressional Oversight............................................................................. 4
Monetary Policy .............................................................................................................................. 9
The Post-Financial Crisis Monetary Policy Framework .......................................................... 11
Reducing Interest Rates After a High Inflation Episode ......................................................... 13
The Fed’s Balance Sheet After QE and QT............................................................................. 17
Losses on the Fed’s Balance Sheet ................................................................................... 20
Mandate Reform and Monetary Policy Strategy ..................................................................... 23
Bank Regulation ............................................................................................................................ 26
Regulatory Relief .................................................................................................................... 27
Large Bank Issues ............................................................................................................. 29
Fed Supervision ................................................................................................................ 33
Climate Change ....................................................................................................................... 37
Cryptocurrency and Banking .................................................................................................. 38
Payments ....................................................................................................................................... 41
Access to Master Accounts ..................................................................................................... 42
Payment Stablecoins ............................................................................................................... 44
Central Bank Digital Currency ................................................................................................ 45
Lender of Last Resort .................................................................................................................... 47
Section 13(3) ........................................................................................................................... 48
Pandemic LOLR Actions ........................................................................................................ 48
Bank Term Funding Program .................................................................................................. 48
Discount Window Reforms ..................................................................................................... 49
Figures
Figure 1. Federal Reserve Districts ................................................................................................. 2
Figure 2. Examples of Fed Oversight, Disclosure, and Independence ............................................ 7
Figure 3. Illustration of Supply and Demand for Bank Reserves and the Federal Funds
Rate ............................................................................................................................................ 12
Figure 4. Fed Net Remittances to Treasury ................................................................................... 21
Tables
Table 1. Federal Reserve Balance Sheet Trends ............................................................................ 17
Contacts
Author Information........................................................................................................................ 50
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Federal Reserve: Policy Issues in the 119th Congress
Introduction
The Federal Reserve Act of 1913 (12 U.S.C. §§221 et seq.) created the Federal Reserve (Fed) as
the nation’s central bank. The Fed’s responsibilities fall into four main categories: monetary
policy, regulation of certain banks and other financial firms, provision and oversight of certain
payment systems, and lender of last resort. The Fed has significant independence from Congress
and the Administration to fulfill its duties, but Congress retains oversight responsibilities. This
report provides an overview of current policy issues in each of those four areas, as well as
oversight and independence. Each section provides background, recent Fed or congressional
action, and policy questions for Congress.
The Fed’s powers and mission have evolved since its creation. Its independence gives it latitude
to act quickly and decisively. For that reason (and its status as off budget and self-financed),
Congress has often expressed interest in expanding the Fed’s responsibilities into new public
policy areas. However, the Fed’s tools are limited. Expanding the Fed’s responsibilities into new
areas necessarily causes the Fed to grapple with more political trade-offs, which makes it harder
to justify its independence in a democratic system. Because its tools are limited, giving the Fed
new responsibilities can also dilute its effectiveness.
Organizational Structure of the Fed
The Federal Reserve System is composed of 12 regional Federal Reserve banks overseen by the
Board of Governors in Washington, DC. Figure 1 illustrates the city in which each bank is
headquartered and the area of each bank’s jurisdiction. The creators of the Fed intended to create
a decentralized system to allay concerns that power would be concentrated in New York, the
primary financial center. Contradictions between this desire and the duties of the Fed (such as
monetary policy), which were more effectively carried out when centralized, led to a series of
reforms in the early years to make the system more centralized.1 Competing desires for a
centralized system and a decentralized system are at the root of some policy proposals to change
the Fed’s structure.
1 Roger Lowenstein, America’s Bank (Penguin, 2015).
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Figure 1. Federal Reserve Districts
Source: Federal Reserve.
The board is composed of seven governors nominated by the President and confirmed by the
Senate. Under Title 12, Section 241, of the U.S. Code, the President is required to make selections
“with a due regard to a fair representation of financial, agricultural, industrial, and commercial
interests” and may not select more than one nominee from any of the 12 Federal Reserve districts.
One of the governors must have “primary experience working in or supervising community
banks.” The President nominates (and the Senate confirms) a chair and two vice chairs from
among the governors, one of whom is responsible for supervision of the entities the Fed regulates.
The governors serve nonrenewable 14-year terms, but the chair and vice chairs serve renewable
four-year terms. There is no limit on the number of board members that can be chosen from one
political party (officially, board members do not have any political affiliation), unlike many other
federal regulators and independent agencies. Regional bank presidents are chosen by their boards
with the approval of the Board of Governors.
Long terms and a full board mean that President Trump may have the opportunity to appoint only
two governors during his current term. However, in practice, few governors serve out their full
14-year terms, so vacancies may arise sooner. The President can choose whether to renominate
the chair and two vice chairs sooner—Jerome Powell’s term as chair ends in 2026, Michelle
Bowman’s term as vice chair for supervision ends in 2029, and Philip Jefferson’s term as vice
chair ends in 2027. All three have separate terms as governors that expire after their respective
chair/vice chair terms end.
In general, policy is formulated by the Board of Governors and carried out by the regional banks,
with one notable exception: Monetary policy is made by the Federal Open Market Committee
(FOMC), which is composed of the seven governors, the president of the New York Fed, and four
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other regional bank presidents. Representation for these four seats rotates among the other 11
regional banks. The FOMC is chaired by the Fed chair.
The Fed’s budget is not subject to the congressional appropriation or authorization processes. The
Fed is funded by fees paid by financial institutions that use its services and mostly by the income
generated by securities it owns. As discussed below,2 its income typically exceeds its expenses,
and it remits most of its net income to the Treasury, where it is added to general revenues. By
statute, the Consumer Financial Protection Bureau (CFPB) is funded by a transfer from the Fed in
an amount set by the CFPB director. In the 119th Congress, P.L. 119-21 reduced the statutory cap
on this transfer.
The Fed’s capital consists of stock and a surplus. The surplus is capped at $6.825 billion by law.
(Congress reduced the Fed’s financial surplus as a budgetary “pay for” in P.L. 114-94, P.L. 115123, and P.L. 115-174.3) Private banks regulated by the Fed must buy stock in the Fed to become
member banks. Membership is mandatory for federally chartered banks but optional for statechartered banks. Unlike common stock in a private company, this stock does not confer
ownership control. However, it does provide the banks with the right to choose two-thirds of the
directors of the boards of the 12 Fed regional banks (of whom one-third are representatives of the
banking industry and one-third are representatives of other interests). The stock also pays a
dividend set in statute. As amended by P.L. 114-94, the dividend is 6% for banks with less than
$10 billion in assets (as of 2015 and adjusted for inflation thereafter)—above market rates in
recent decades—and the lower of 6% or the 10-year Treasury yield for banks with more than $10
billion in assets.
In the 119th Congress, the House Financial Services Committee ordered to be reported an
amendment in the nature of a substitute to H.R. 6554. The bill would give governors with
community bank experience authority to develop community bank regulatory policies in
consultation with the vice chair for supervision (if those individuals are not the same—as is the
case presently) and testify before the committees of jurisdiction semiannually. The bill defines
community bank as one with less than $17 billion in assets, with annual adjustments for nominal
growth in gross domestic product (GDP).4
Congress has debated structural changes to the Fed.5 Policy issues for Congress going forward
could include the following:
•
•
•
Should the current number and location of Federal Reserve banks, which has not
changed since their creation over a hundred years ago, be updated to reflect
economic and population shifts since then?
Should smaller banks receive a dividend fixed in statute, or should their dividend
adjust with market interest rates, as is the case for larger banks?
Should banks have seats on the Federal Reserve banks’ boards when they are
regulated by the Fed, given the inherent conflict of interest in such an
arrangement? Or are current safeguards sufficient?
2 See the section titled “Losses on the Fed’s Balance Sheet.”
3 The acts that statutorily reduced the Fed’s surplus are listed at Board of Governors of the Federal Reserve System,
“Federal Reserve Board Announces Reserve Bank Income and Expense Data and Transfers to the Treasury for 2021,”
press release, January 14, 2022, https://www.federalreserve.gov/newsevents/pressreleases/other20220114a.htm.
4 The amendment is available at https://docs.house.gov/meetings/BA/BA00/20251216/118780/BILLS-119-HR6554D000594-Amdt-16.pdf.
5 In the 118th Congress, the House passed H.R. 4790, which would have, among other things, eliminated the position of
vice chair for supervision.
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•
•
•
Should Federal Reserve regional banks conduct research and promote policies
outside the scope of the statutory duties of the Federal Reserve System? If not,
are new statutory restrictions appropriate?
Should the geographic diversity requirements for board members be repealed or
be interpreted more strictly than they have been in practice? Should professional
qualification requirements be more specific, or does diverse experience lead to
better policy outcomes?
Should seats on the board be set aside for other interest groups besides
community banks? Is it inappropriate to have any seats set aside for specific
interest groups? Should the community bank representative be responsible for
community bank regulation?
For more information, see CRS In Focus IF10054, Introduction to Financial Services: The
Federal Reserve, by Marc Labonte.
Fed Independence and Congressional Oversight
As discussed in the introduction, the Fed has been granted an unusually high degree of
independence from Congress and the President.6 There are some structural characteristics that
contribute to the Fed’s independence—for example, the Fed is self-funded and not subject to
appropriations, and the governors serve long, fixed terms and may be removed only “for cause,” a
higher standard than the “at will” removal standard that applies to Cabinet members and many
other political appointees.7 But independence also stems from culture and norms, such as
nonpartisan decisionmaking based on consensus. Norms are a reflection of history, tradition, and
the actions of individuals who have led the institution, and they are not immutable—particularly
when leadership changes.8
President Trump has taken multiple steps that, if seen through, could reduce the Fed’s
independence. In February 2025, President Trump issued an executive order (E.O.) “to ensure
Presidential supervision and control of the entire executive branch” by reducing the independence
of regulatory agencies such as the Fed.9 The E.O. ordered the Office of Management and Budget
(OMB) to establish performance standards and management objectives for independent agencies
and review their “obligations for consistency with the President’s policies and priorities.” The
E.O. would also require agencies to submit proposed and final rules to OMB for review and
approval prior to issuance. The E.O. included an exception for monetary policy, implying that the
Fed could independently conduct monetary policy while its regulatory duties would be under the
purview of the President. Because the same leadership is responsible for setting both, it is unclear
how this delineation could be effectively maintained in practice.10
6 In terms of relative independence, the Federal Reserve banks are more independent than the Board of Governors is in
the sense that they are subject to fewer of the rules that apply to government agencies.
7 For more information, see CRS Report R43391, Independence of Federal Financial Regulators: Structure, Funding,
and Other Issues, by Henry B. Hogue, Marc Labonte, and Baird Webel.
8 For a history of independence, see Gary Richardson and David W. Wilcox, “How Congress Designed the Federal
Reserve to Be Independent of Presidential Control,” Journal of Economic Perspectives, vol. 39, no. 3 (Summer 2025),
pp. 221-238, https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.20251447.
9 Executive Order 14215, “Ensuring Accountability for All Agencies,” 90 Federal Register 10447, February 18, 2025,
https://www.federalregister.gov/documents/2025/02/24/2025-03063/ensuring-accountability-for-all-agencies.
10 OMB’s database on rules under review does not include any entries for the Fed. (See https://www.reginfo.gov/
(continued...)
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Given the Fed’s uniquely independent status, it is unclear which, if any, of the recent executive
orders the board or the Fed banks are required to comply with. At a press conference on January
29, 2025, Chair Powell said, “We’re reviewing the orders and the associated details as they’re
made available. And, as has been our practice over many administrations, we are working to align
our policies with the executive orders as appropriate and consistent with applicable law.”11 The
Fed has taken actions consistent at least in part with some, but not all, of the recent executive
orders, including a hiring freeze and staff reduction12; a return to in-person work13; ending
diversity, equity, and inclusion initiatives14; and climate change.15
Breaking with tradition,16 the President has been publicly vocal in his criticism of the Fed’s
monetary policy decisions (preferring the Fed to reduce rates more rapidly) and has called for
Chair Powell to resign.17 He has reportedly considered whether cost overruns of a building
renovation project would constitute “for cause” grounds for dismissing Powell.18 On January 9,
2026, the Department of Justice served the Fed with subpoenas threatening a criminal indictment
related to Chair Powell’s testimony before the Senate Banking Committee in June 2025 on the
building renovations. In response, Chair Powell made a statement where he said that
this unprecedented action should be seen in the broader context of the administration’s
threats and ongoing pressure.
public/do/eoPackageMain.) Most of the Fed’s regulatory rules are issued jointly with other financial agencies that may
also be subject to the executive order’s requirement for OMB review.
11 Wall Street Journal, “Transcript: Fed Chief Jerome Powell’s Postmeeting Press Conference,” January 29, 2025,
https://www.wsj.com/articles/transcript-fed-chief-jerome-powells-postmeeting-press-conference-c78cbf5a.
12 Colby Smith, “Trump’s Executive Orders Leave Imprint on the Fed,” New York Times, February 7, 2025,
https://www.nytimes.com/2025/02/07/business/federal-reserve-trump-executive-orders.html; Annmarie Hordern et al.,
“Fed to Shrink Staff by About 10% Over the Next Couple of Years,” Bloomberg Law News, June 2, 2025.
13 The White House, “Return to In-Person Work,” January 20, 2025, https://www.whitehouse.gov/presidential-actions/
2025/01/return-to-in-person-work; Craig Torres, “Fed Ends Remote Work Arrangement for Board Staff and Officers,”
Bloomberg, March 26, 2025, https://www.bloomberg.com/news/articles/2025-03-27/fed-ends-remote-workarrangement-for-board-staff-and-officers.
14 Executive Order 14151, “Ending Radical and Wasteful Government DEI Programs and Preferencing,” 90 Federal
Register 8339, January 20, 2025, https://www.federalregister.gov/documents/2025/01/29/2025-01953/ending-radicaland-wasteful-government-dei-programs-and-preferencing; Howard Schneider, “Fed Axed Diversity Section From
Website Around Time of Trump’s Executive Order,” Reuters, January 23, 2025, https://www.reuters.com/world/us/fedaxed-diversity-section-website-around-time-trumps-executive-order-2025-01-23/.
15 Executive Order 14154, “Unleashing American Energy,” 90 Federal Register 8353, January 20, 2025,
https://www.federalregister.gov/documents/2025/01/29/2025-01956/unleashing-american-energy. See the section
below titled “Climate Change” for more details.
16 There are historical examples of chairs not being reappointed when their terms expire (most recently, Janet Yellen in
2018) and an example of a President successfully requesting that a chair resign before his term has ended (Thomas
McCabe resigned at the request of Harry Truman after McCabe had successfully asserted the Fed’s independence from
the Treasury over setting interest rates in 1951) but no examples of Presidents removing chairs against their will before
their terms have ended. There is also a historical example of a governor remaining on the board after the President did
not reappoint him as chair (Marriner Eccles in 1948). Statute is silent and the courts have not had the opportunity to
rule on whether chairs or vice chairs could be removed against their will before their terms expire. See Robert L. Hetzel
and Ralph F. Leach, “The Treasury-Fed Accord: A New Narrative Account,” Federal Reserve Bank of Richmond
Economic Quarterly, Winter 2001, https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/
economic_quarterly/2001/winter/pdf/hetzel.pdf; Michael C. Jensen, “Marriner S. Eccles Is Dead at 87,” New York
Times, December 20, 1977, https://timesmachine.nytimes.com/timesmachine/1977/12/20/86356088.html?
pageNumber=38.
17 Amanda Macias, “Trump Calls Fed Chair Powell a ‘Clown’ and Slams Fed Renovation,” FOXBusiness, November
19, 2025, https://www.foxbusiness.com/politics/fed-meeting-puts-spotlight-back-trumps-rift-chairman-powell.
18 Natalie Sherman and Bernd Debusmann Jr., “Trump Bickers with Powell over Fed Renovation Costs,” BBC News,
July 25, 2025, https://www.bbc.com/news/articles/c1ljlvg1e7eo.
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This new threat is not about my testimony last June or about the renovation of the Federal
Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and
other public disclosures made every effort to keep Congress informed about the renovation
project. Those are pretexts. The threat of criminal charges is a consequence of the Federal
Reserve setting interest rates based on our best assessment of what will serve the public,
rather than following the preferences of the President.
This is about whether the Fed will be able to continue to set interest rates based on evidence
and economic conditions—or whether instead monetary policy will be directed by political
pressure or intimidation.19
The President has also taken a number of steps to change the composition of the board. Michael
Barr stepped down as vice chair for supervision in January 2025 (before his term had ended) to
avoid a potential legal challenge over whether the President could remove him,20 leading to
Governor Michelle Bowman replacing him as vice chair in June. In August 2025, President
Trump attempted to dismiss Governor Lisa Cook for cause on the grounds that she purportedly
falsified her mortgage application before she was governor. Litigation surrounding that attempt is
ongoing.21 In September 2025, the President nominated and the Senate confirmed Stephen Miran
to the Board of Governors. Unusually, Miran testified in his nomination hearing that he would be
taking a paid absence from his position as chair of the President’s Economic Advisers while he
served at the Fed.22 Since becoming governor, Miran dissented from each interest rate vote in
2025 in favor of reducing rates more aggressively. Some observers are concerned that the
President intends to replace Powell at the end of his term in May 2026 (or sooner) with a new
chair who will not be independent of the President. For example, President Trump said that a
litmus test for his nominee will be whether he or she would immediately lower interest rates.23
The Fed’s monetary decisions, such as its track record with high inflation from 2021 to 2023,
expose it to valid criticism.24 But economists view central bank independence as leading to better
monetary policymaking, because, subject to less short-term political pressure, the central bank
can choose policies that are optimal under a longer-term horizon. Many economists believe that
this results in lower and more stable inflation, because an independent central bank is more
willing to raise interest rates to reduce inflation and less tempted to reduce rates to run the
economy hot before an election.25 The relationship between independence and outcomes in
regulation is less clear cut, as regulatory policy inherently faces political trade-offs.
19 Chair Jerome H. Powell, Statement, January 11, 2026, https://www.federalreserve.gov/newsevents/speech/
powell20260111a.htm.
20 Pete Schroeder, “Fed’s Barr to Resign Early from Regulatory Job to Avoid Legal Fight with Trump,” Reuters,
January 6, 2025. The Federal Reserve Act provides “for cause” removal protections to Fed governors but is silent on
the grounds for removal in their leadership capacity as chair or vice chair beyond granting the positions fixed terms.
21 Andrew Chung, “US Supreme Court to Hear Trump’s Bid to Fire Fed’s Lisa Cook on January 21,” Reuters,
November 12, 2025, https://www.reuters.com/world/us-supreme-court-hear-trumps-bid-fire-feds-cook-january-212025-11-12/.
22
CQ Congressional Transcripts, “Senate Banking, Housing and Urban Affairs Committee Holds Hearing on Pending
Nominations,” September 4, 2025, https://plus.cq.com/doc/congressionaltranscripts-8313987?1.
23 Politico, “Full Transcript: POLITICO’s Interview with Donald Trump,” December 9, 2025,
https://www.politico.com/news/2025/12/09/donald-trump-full-interview-transcript-00681693.
24 See the section below titled “Reducing Interest Rates After a High Inflation Episode.”
25 See, for example, Kristalina Georgieva, “Strengthen Central Bank Independence to Protect the World Economy,”
International Monetary Fund, March 21, 2024, https://www.imf.org/en/Blogs/Articles/2024/03/21/strengthen-centralbank-independence-to-protect-the-world-economy. The economic argument for independence is not based on the
notion that technocratic, nonpolitical experts are better qualified to make good decisions. That may or may not be true,
but one can also point to many monetary policy decisions the Fed has made historically that proved to be suboptimal
(continued...)
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The trade-off to a more independent Fed is less congressional and executive input into and
oversight of its actions. Likewise, a potential consequence of closer oversight is that it could
reduce the Fed’s political independence. The challenge for Congress is to strike the right balance
between a desire for the Fed to be responsive to Congress and a desire for the Fed’s decisions to
be immune from short-term political calculations. Critics of the Fed have long argued for more
oversight, transparency, and disclosure. Criticism intensified following the extensive assistance
the Fed provided to financial firms during the 2007-2009 financial crisis, the failure of Silicon
Valley Bank in 2023 (the third-largest bank failure in U.S. history), and trading scandals
involving several Fed presidents and governors, including Governor Adriana Kugler in 2025.26
However, some critics downplay the degree of Fed oversight and disclosure that already takes
place. Some studies rank the Fed as one of the more transparent central banks in the world.27
Examples of Fed oversight, disclosure, and independence are listed in Figure 2.
Figure 2. Examples of Fed Oversight, Disclosure, and Independence
Source: CRS.
Notes: GAO = Government Accountability Office, FOIA = Freedom of Information Act, APA = Administrative
Procedures Act, OIRA = Office of Information and Regulatory Affairs.
Although oversight and disclosure are often lumped together, they are separate issues. Oversight
entails independent evaluation of the Fed; disclosure is an issue of what internal information the
Fed releases to the public. Disclosure helps Congress and the public better understand the Fed’s
actions. Up to a point, this makes monetary and regulatory policy more effective, but too much
after the fact. Instead, the economic argument is based on the different incentives that policymakers face when they are
shielded from short-term political factors.
26 U.S. Senate Committee on Banking, Housing, and Urban Affairs, “Chairman Scott Statement on the Need for
Federal Reserve Reform Following New Ethics Violations Report,” press release, November 15, 2025,
https://www.banking.senate.gov/newsroom/majority/chairman-scott-statement-on-the-need-for-federal-reserve-reformfollowing-new-ethics-violations-report.
27 N. Nergiz Dincer and Barry Eichengreen, “Central Bank Transparency and Independence,” International Journal of
Central Banking, March 2014. This study finds an increase in Fed transparency between 1998 and 2010. Christopher
Crowe and Ellen Meade, “Central Bank Independence and Transparency,” European Journal of Political Economy,
vol. 24, no. 4 (December 2008), p. 763. This study finds a slight decline in Fed transparency between 1998 and 2006. It
appears that the authors rate the Fed as less transparent in 2006 than in 1998 because the Fed discontinued its release of
money growth targets between those dates.
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disclosure could make both less effective because they rely on confidential, market-moving
information.
Notable legislative activity has occurred in the 119th Congress in two committees. The Senate
Homeland Security Committee held hearings on S. 2327, which would remove statutory
restrictions on Government Accountability Office (GAO) audits of the Fed and require a GAO
audit. On June 6, 2025, Chairman Tim Scott released legislative text for provisions that the Senate
Banking Committee proposed for the Senate’s version of the FY2025 reconciliation bill.28 It
included a provision to set the pay of board employees who do not work on monetary policy at
70% of Federal Deposit Insurance Corporation (FDIC) employee pay. It was not included in the
version of the bill that became P.L. 119-21.
Policy issues for Congress going forward could include the following:
•
•
•
•
•
•
What is the right balance between Fed independence and oversight and
accountability?
Have existing statutory restrictions interfered with GAO’s ability to evaluate the
Fed on issues of congressional interest?
Has disclosure of lending records since the 2007-2009 financial crisis created any
stigma that has reduced the effectiveness of Fed lending programs? Has it
buttressed public confidence that Fed lending programs do not result in
favoritism or conflicts of interest? Would greater congressional access to private
lending records improve oversight or risk undermining a bank’s financial health
through improper public release?
Should more federal statutes applying to the board and other government
agencies (such as the Freedom of Information Act) be applied to Federal Reserve
banks, or should they continue to be exempted? Do these exemptions effectively
place the banks beyond the reach of congressional oversight?
Should Congress be kept better informed about banks’ supervisory problems, or
would this risk undermining a bank’s financial condition through improper public
release? Does Congress have sufficient aggregate information about bank
supervision to support its oversight role?
Does the 2021 trading scandal involving Federal Reserve bank presidents
indicate that more congressional oversight is needed?29 Does the Fed’s 2022 rules
banning trading by leadership obviate the need for legislation to address that
scandal?30 Is Governor Kugler’s resignation in 2025 a sign that the new rules are
working or that the rules should be enhanced?
28 U.S. Senate Committee on Banking, Housing, and Urban Affairs, “Scott Releases Banking Committee Provisions for
the One Big Beautiful Bill,” press release, June 6, 2025, https://www.banking.senate.gov/newsroom/majority/scottreleases-banking-committee-provisions-for-the-one-big-beautiful-bill.
29 For background, see Brian Cheung, “A Timeline of the Federal Reserve’s Trading Scandal,” Yahoo!news, January
10, 2022, https://news.yahoo.com/a-timeline-of-the-federal-reserves-trading-scandal-104415556.html.
30 In the 117th Congress, Senate Banking Committee Chair Sherrod Brown introduced S. 3076 to prohibit financial
trading by Fed leadership. In February 2022, the FOMC adopted a new policy prohibiting trading by leadership. See
FOMC, Investment and Trading Policy for FOMC Officials, February 17, 2022, https://www.federalreserve.gov/
monetarypolicy/files/FOMC_InvestmentPolicy.pdf. The policy was extended to additional employees in 2024. See
FOMC, “Federal Open Market Committee Announces Updates That Further Enhance Its Policy on Investment and
Trading,” press release, January 31, 2024, https://www.federalreserve.gov/newsevents/pressreleases/
monetary20240131c.htm.
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•
•
•
Should the Fed comply with recent executive orders affecting the federal
government? How would doing so affect its independence?
How should the Senate evaluate the independence of President Trump’s
nominees to the Fed, including the new chair in 2026?
Should Congress strengthen or weaken the Fed’s statutory independence?
For more information, see CRS Report R42079, Federal Reserve: Oversight and Disclosure
Issues, by Marc Labonte.
Monetary Policy
Monetary policy refers to the Fed’s influence over interest rates and the money supply to alter
economic activity. Congress has delegated monetary policy to the Fed but conducts oversight to
ensure that the Fed meets its statutory mandate from 1977 of “maximum employment, stable
prices, and moderate long-term interest rates” (12 U.S.C. §225a). The first two goals are referred
to as the dual mandate. Since 2012, the Fed has defined stable prices as 2% inflation, measured as
the annual percentage change in the Personal Consumption Expenditures (PCE) price index.
Monetary Misconceptions
There are many common misconceptions surrounding the Fed and monetary policy, some involving obsolete
practices. This text box highlights a few, with the misconception in bold:
•
The Fed conducts monetary policy by buying and selling Treasury securities. This is the classic
textbook explanation of how the Fed sets the federal funds rate (FFR), but this method has not been used
since 2008. The Fed’s new ample reserves framework makes “open market operations” ineffective. Now the
Fed targets the FFR by setting the interest rates it controls (see Figure 3) and buys Treasury (and other)
securities when it wants to expand the size of its balance sheet. Even before 2008, the Fed mainly used
repurchase agreements (repos) instead of outright transactions to set the FFR.
•
The Fed sets all interest rates. The vast majority of interest rates in the economy are market rates
determined by supply and demand. That includes the Fed’s target of monetary policy, the FFR. The Fed does
not set the FFR—rather, it uses its tools to keep the FFR within the Fed’s target range of 0.25 percentage
points. The Fed does set a few interest rates it controls directly, however: the interest on bank reserves held
at the Fed, the discount rate charged at the discount window, and the borrowing and lending rates levied at
its repo facilities.
•
The discount window charges a penalty rate. It is often said that this is done to dissuade banks from
using the discount window excessively. This was true from 2003 to 2020, but since 2020 the Fed has set the
discount rate at the top of the federal funds range. (The effective FFR is typically closer to the middle of the
range, which is 0.25 percentage points wide.) It is now more concerned with banks not using the discount
window enough than using it excessively, and it has adopted a “no questions asked” policy toward
borrowers.
•
The Fed uses reserve requirements to influence monetary policy and prudential regulation.
Reserve requirements were permanently set to zero in 2020. Once the Fed moved to an abundant reserve
framework, reserve requirements were unnecessary. Even before that, the Fed did not change reserve
requirements as a monetary policy tool because it was considered too blunt a tool. 31
•
The Fed conducts monetary policy by targeting the money supply. The Fed targets interest rates
rather than the money supply. It cannot control both simultaneously. The Fed considers money demand to be
too erratic for the money supply to be a useful policy target.
31 Their removal is related to the shift to the “abundant reserves” monetary framework discussed below. See Federal
Reserve, “Federal Reserve Actions to Support the Flow of Credit to Households and Businesses,” press release, March
15, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm. According to the Fed,
“Currently, the Board has no plans to re-impose reserve requirements. However, the Board may adjust reserve
requirement ratios in the future if conditions warrant.” Federal Reserve, “Reserves Administration Frequently Asked
Questions,” https://www.frbservices.org/resources/central-bank/faq/reserve-account-admin-app.html.
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•
Banks need to join the Federal Reserve System to use the discount window or hold master
accounts at the Fed. Since 1980, all insured depository institutions can borrow from the discount window
and hold master accounts.
•
The dollar is backed by gold. The Fed does not own gold—the New York Fed safeguards the gold
holdings of central banks, governments, and official international organizations that choose to store their gold
there. The federal government’s gold holdings are small compared to the currency in circulation or the
federal debt. The federal government abandoned a true gold standard in 1933.
•
The government prints money to finance the deficit (or) the government cannot default on the
debt because the Fed will monetize deficits. Legally, the Treasury cannot issue money—only the Fed
can—and the Fed cannot purchase newly issued debt directly from the federal government. The federal debt
is financed by the government issuing Treasury securities and selling them to private investors. The Fed is a
large investor in Treasury securities (acquired on the secondary market) and is currently reducing its
holdings. In a scenario where private investors became unwilling to finance future deficits, the Fed could
choose to be the buyer of last resort of federal debt on the open market, but it might choose not to because
it would be inconsistent with its statutory mandate of price stability. The government cannot compel the Fed
to purchase debt.
This report discusses these issues in more detail.
As mentioned above, the FOMC sets monetary policy. FOMC meetings are regularly scheduled
every six weeks, but the chair sometimes calls unscheduled meetings. After each of these
meetings, the FOMC releases a statement that announces any changes to monetary policy, the
rationale for the current monetary stance, and the future outlook.
In normal economic conditions, the Fed’s primary instrument for setting monetary policy is the
FFR, the overnight interest rate in the federal funds market—a private market where banks lend
to each other. The Fed sets a target range for the FFR that is 0.25 percentage points wide and uses
its tools to keep the actual FFR within that range. When the Fed wants to stimulate the economy,
it makes policy more expansionary by reducing interest rates. When it wants to make policy more
contractionary or tighter, it raises rates. In principle, there is a neutral interest rate that is neither
expansionary not contractionary, although it is difficult to estimate what the neutral rate is in
practice, and it seems to change over time.32 The Fed aims to make monetary policy
expansionary, contractionary, or neutral based on how employment and inflation are performing
compared to its statutory goals: Expansionary policy can boost employment but risks spurring
inflation, while contractionary policy can constrain inflation but risks decreasing employment, as
explained below.
Changes in the FFR target lead to changes in interest rates throughout the economy, although
these changes are mostly less than one to one. Changes in interest rates affect overall economic
activity by changing the demand for interest-sensitive spending (goods and services that are
bought on credit). The main categories of interest-sensitive spending are business physical capital
investment (e.g., plant and equipment), consumer durables (e.g., automobiles, appliances), and
residential investment (mainly, new housing construction). All else equal, higher interest rates
reduce interest-sensitive spending, and lower interest rates increase interest-sensitive spending.
Interest rates also influence the demand for exports and imports by affecting the value of the
dollar. All else equal, higher interest rates increase net foreign capital inflows as U.S. assets
become more attractive relative to foreign assets. To purchase U.S. assets, foreigners must first
purchase U.S. dollars, pushing up the value of the dollar. When the value of the dollar rises, the
price of foreign imports declines relative to U.S. import-competing goods, and U.S. exports
become more expensive relative to foreign goods. As a result, net exports (exports less imports)
32 See CRS Insight IN11056, Low Interest Rates, Part 2: Implications for the Federal Reserve, by Marc Labonte.
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decrease. When interest rates fall, all of these factors work in reverse, and net exports increase, all
else equal.
Business investment, consumer durables, residential investment, and net exports are all
components of GDP. Thus, if expansionary monetary policy causes interest-sensitive spending to
rise, it increases GDP in the short run. This increases employment as more workers are hired to
meet increased demand for goods and services. An increase in spending also puts upward
pressure on inflation.33 Contractionary monetary policy has the opposite effect on GDP,
employment, and inflation. Most economists believe that although monetary policy can
permanently change the inflation rate, it cannot permanently change the level or growth rate of
GDP, because long-run GDP is determined by the economy’s productive capacity (e.g., the size of
the labor force and capital stock). If monetary policy pushes demand above what the economy
can produce, then inflation should eventually rise to restore equilibrium. When setting monetary
policy, the Fed must take into account the lags between a change in policy and economic
conditions so that rate changes can be made preemptively.
The Fed generally tries to avoid policy surprises, and FOMC members regularly communicate
their views on the future direction of monetary policy to the public.34 The Fed describes its
monetary policy plans as “data dependent,” meaning plans would be altered if actual employment
or inflation deviate from its forecast. Data is volatile, however, and true data dependence in a
policy setting would lead to sudden shifts in policy. In practice, the Fed likes to avoid surprises as
much as possible, so large-scale shifts in course are relatively infrequent.
Besides monetary policy, fiscal policy (statutory changes in spending and revenue levels) is the
other primary tool for the federal government to affect macroeconomic conditions.35 In addition
to affecting employment and inflation, both monetary policy and fiscal policy affect interest rates
but in opposite directions. Expansionary monetary policy reduces interest rates, whereas
expansionary fiscal policy increases the supply of debt that must be financed by private investors,
thereby increasing interest rates, all else equal. As a practical matter, monetary policy can be
adjusted far more frequently and finely than fiscal policy can. Whereas Congress is responding to
numerous policy considerations when setting fiscal policy, monetary policy is trying to achieve
only two goals—price stability and maximum employment. For these reasons, economists view
monetary policy as the primary macroeconomic stabilization tool. Given the Fed’s independence,
fiscal and monetary policy can potentially work together (e.g., both expansionary) or at odds with
each other (e.g., one is expansionary and the other is contractionary) at any given time.
For more information, see CRS In Focus IF11751, Introduction to U.S. Economy: Monetary
Policy, by Marc Labonte.
The Post-Financial Crisis Monetary Policy Framework
Following the 2007-2009 financial crisis, the Fed changed how it conducted monetary policy. The
Fed now maintains the FFR target primarily by setting the interest rate it pays banks on reserves
held at the Fed (interest on reserves, or IOR) and by using reverse repos to drain liquidity from
33 The Fed targets interest rates instead of money supply growth because the relationship between money supply
growth and inflation is unpredictable. The current target range is reported at Federal Reserve, “Policy Tools,”
https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
34 The Fed imposes “blackout” rules to prevent officials from publicly discussing potentially market-moving topics
close to FOMC meetings.
35 See CRS In Focus IF11253, Introduction to U.S. Economy: Fiscal Policy, by Lida R. Weinstock.
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the financial system. It received statutory authority to pay interest on reserves in 2008.36 In 2014,
the Fed created a standing reverse repo facility to help put a floor under the FFR. Financial
market participants earn interest by lending excess cash to the Fed at the reverse repo facility. The
Fed sets the IOR and the rate offered on its repos and reverse repos directly, unlike the FFR. The
IOR and repo rate anchor the FFR, as shown in Figure 3, because banks will generally deploy
their surplus reserves to earn whichever rate is most attractive.37 Currently, the top of the target
range is set equal to the rate for borrowing from the Fed through the discount window (called the
primary credit rate) and its standing repo operations, and the bottom of the range is equal to the
rate for lending to the Fed through the overnight reverse repo facility. This keeps the FFR within
the target range. The IOR is currently set slightly below the top of the range.
Figure 3. Illustration of Supply and Demand for Bank
Reserves and the Federal Funds Rate
Source: CRS.
Note: See text for details.
Before the crisis, monetary policy was conducted differently. The Fed did not have authority to
pay interest on bank reserves until 2008, so it could not target the FFR by setting the IOR.38
Instead, the Fed directly intervened in the federal funds market through open market operations
that added or removed reserves from the federal funds market. Open market operations could be
conducted by buying or selling Treasury securities but were typically conducted through repos.
The Fed’s counterparties in open market operations (called primary dealers) are major
participants in the Treasury market. When the Fed buys Treasury securities or lends in the repo
36 Repos are economically equivalent to short-term collateralized loans. Depending on whether viewed from the
perspective of the borrower or lender, they are referred to as repos or reverse repos, respectively. For a primer on repos,
see CRS In Focus IF11383, Repurchase Agreements (Repos): A Primer, by Marc Labonte.
37 The IOR might be expected to set a floor on the FFR, but in practice the actual FFR has typically been slightly lower
than the IOR. This discrepancy has been ascribed to the fact that some participants in the federal funds market—such as
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—do not earn interest on reserves held at the Fed. See
Gara Afonso et al., “Who’s Lending in the Fed Funds Market,” Federal Reserve Bank of New York, December 2,
2013, http://libertystreeteconomics.newyorkfed.org/2013/12/whos-lending-in-the-fed-fundsmarket.html#.VDWOgxYXOmo.
38 The authority (12 U.S.C. §461(b)) for the Fed to pay IOR was originally granted in the Financial Services Regulatory
Relief Act of 2006, beginning in 2011. The start date was made immediate in the Emergency Economic Stabilization
Act of 2008 (P.L. 110-343).
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market, it increases bank reserves, putting downward pressure on the FFR. Selling securities or
borrowing in the repo market (which the Fed calls a reverse repo) has the opposite effect. The Fed
did not create any expectation that repo market participants could rely on it to provide needed
liquidity or remove excess liquidity from the market. (As noted above, the Fed still purchases
Treasury securities and uses repos and reverse repos, but it no longer does so to target the FFR.)
Before the crisis, the Fed could target the FFR through direct intervention in the federal funds
market because reserves were scarce—banks held only enough reserves to slightly exceed the
reserve requirements set by the Fed. Now, banks hold trillions of dollars of reserves despite the
fact that the Fed eliminated reserve requirements in 2020. The overall level of reserves is the
result of Fed actions—primarily quantitative easing (QE), discussed below—that have increased
the Fed’s balance sheet and are not a choice of banks. Thus, it is represented by a vertical line in
Figure 3. After the Fed ended QE in 2014, it decided to maintain abundant reserves (sometimes
referred to as the abundant reserves framework) instead of fully shrinking its balance sheet and
returning to its pre-crisis scarce reserves monetary framework. With reserves so abundant, adding
or removing reserves could not raise the FFR above zero in the absence of IOR and a standing
(i.e., on-demand) reverse repo facility.
During the 2007-2009 financial crisis and the COVID-19 pandemic, the Fed made very large
amounts of repo funding available on an ad hoc basis to ensure that markets stayed liquid. In
2021, the Fed added the Standing Repo Facility—where primary dealers and banks could borrow
repo financing from the Fed on demand—to make it easier to keep the FFR from exceeding its
target as it shrinks its balance sheet. But the facility also shifted the assurance that Fed repo
funding would be available in times of need from an ad hoc to a permanent basis. In 2025, the
Fed renamed the Standing Repo Facility to be Standing Repo Operations (SROs)—perhaps in an
attempt to reduce stigma associated with its use—but did not change the terms of the program.
The repo and reverse repo facilities, which fundamentally altered the functioning of a private
lending market (by creating a permanent Fed backstop in the market), were created using existing
authority without congressional approval or notice-and-comment rulemaking.
Reducing Interest Rates After a High Inflation Episode
In response to the historically large and sudden contraction in economic activity caused by the
onset of the COVID-19 pandemic, the Fed provided monetary stimulus that was matched in
magnitude only by the stimulus provided during the 2007-2009 financial crisis. This stimulus
included nontraditional actions such as reducing the FFR to the zero lower bound, purchasing
trillions of dollars of securities,39 and providing billions of dollars of credit to the financial
sector.40
This stimulus safeguarded against the risk that the contraction in economic activity would be
prolonged. In hindsight, economic activity rebounded relatively quickly, and high inflation turned
out to be the larger concern. After decades of low inflation, inflation has been above the Fed’s 2%
target since March 2021. PCE inflation (measured as the 12-month change) peaked above 7% in
June 2022, its highest level in decades. Several factors contributed to the rise in inflation. On the
supply side, these included supply chain disruptions and high commodity prices following the
39 See the section below titled “The Fed’s Balance Sheet After QE and QT.”
40 See the section below titled “Pandemic LOLR Actions.”
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Russian invasion of Ukraine. On the demand side, these included strong consumer demand, in
part because of the fiscal and monetary stimulus put in place during the pandemic.41
Mainstream economists view the ability to effectively reduce inflation to lay primarily with the
Fed. In the words of Fed Chair Jerome Powell, “The first lesson [from the history of inflation] is
that central banks can and should take responsibility for delivering low and stable inflation.”42
Despite higher inflation since 2021, the Fed left zero interest rates in place until March 2022,
because Fed leadership assumed that the initial increase in inflation in 2021 was transitory and
due to the ongoing threat of the pandemic. Decades of sustained low—at times, undesirably
low—inflation may have led the Fed to underestimate the threat of high inflation. By the time
stimulus began to be withdrawn, inflation had become high, widespread, and deeply embedded.
Beginning in March 2022, the primary focus of monetary policy shifted to reducing high
inflation, which required contractionary monetary policy. The Fed raised rates repeatedly
following each FOMC meeting from March 2022 to July 2023—by as much as 0.75 percentage
points following some meetings—and began a gradual reduction of the balance sheet in June
2022.43 By July 2023, rates were at their highest levels since 2007.
Since its peak, inflation has rapidly declined and employment growth has moderated (perhaps to a
more sustainable growth rate) without a “hard landing.”44 The combination of improving supply
chains, lower energy prices, and tighter monetary policy brought inflation down much closer to
the Fed’s 2% target, but it has remained slightly above the target to date.
In 2024, in response to a few lower monthly inflation readings, the Fed reduced rates three times
between September and December 2024 with the goal of bringing interest rates down to a more
neutral level that would neither stimulate nor contract economic activity. The Fed then left the
FFR unchanged until September 2025, largely to wait and see how the economy would respond to
the increase in tariffs implemented by President Trump in 2025, which were potentially large
changes as initially announced but have been repeatedly modified.45 Tariffs feed through to
consumer price inflation to the extent that producers pass on the cost of tariffs to consumers by
raising retail prices. This effect would potentially call for higher interest rates to curb inflation—
but the Fed has assumed that any increase in inflation from tariffs would be temporary, in which
case (in its view) interest rates did not need to be increased in response. Tariffs can also
potentially disrupt economic activity in the short run, potentially curbing employment growth.
This effect would call for lower interest rates.
By September 2025, the Fed deemed that it could start cutting rates again to achieve (in its view)
a more neutral policy stance. It made rate cuts at the three final FOMC meetings of 2025. (The
final two rate cuts were made under greater uncertainty because of data availability issues and the
potential for economic disruptions caused by the government shutdown.)
41 See CRS Report R47273, Inflation in the U.S. Economy: Causes and Policy Options, by Marc Labonte and Lida R.
Weinstock.
42 Chair Jerome H. Powell, “Monetary Policy and Price Stability,” speech, August 26, 2022,
https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm.
43 The Fed can mitigate inflationary pressures by raising interest rates or reducing the size of its balance sheet, and
different combinations of the two will yield the same economic outcomes. In practice, it has based its inflation
reduction strategy on raising interest rates and has not based its balance sheet reduction plans on the inflation rate.
44 GDP growth was strong in the second and third quarters of 2024, however, so it is unclear whether the slowdown in
employment growth is demand-driven.
45 Testimony of Federal Reserve Chair Jerome H. Powell, “Semiannual Monetary Policy Report to the Congress,” U.S.
Congress, House Committee on Financial Services, June 24, 2025, https://www.federalreserve.gov/newsevents/
testimony/powell20250624a.htm.
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The FOMC justified cutting rates on the basis that “downside risks to employment rose in recent
months,”46 which risked tipping the economy into recession if job growth further deteriorated.
Monthly job growth was below average from May to September 2025, and the unemployment
rate has risen by one percentage point since mid-2023 and about half a percentage point since the
beginning of 2025—although October and November 2025 data were not available at the time
because of the shutdown.47 On the other hand, the unemployment rate is still relatively low by
historical standards, and the “break even” job growth figure needed to prevent unemployment
from rising is estimated to have declined in 2025 due to the decline in immigration and the aging
of the labor force.48 For example, research from the Federal Reserve Bank of Dallas estimates that
the break-even rate has fallen from 250,000 jobs per month in mid-2023 to 30,000 in 2025.49
Thus, the employment slowdown may not be primarily caused by cyclical weakness, raising
questions about the primary justification for cutting rates.
The Fed decided to cut rates although (both headline and core) PCE inflation over the past 12
months has remained above 2% in each month since 2021. Inflation fell until April 2024, but
since then both headline and core inflation were above 2% and below 3% each month, showing
no downward trend—although October and November 2025 data were not available at the time
because of the shutdown.
The December rate cut was only the third in the past 10 years to feature three dissenting votes,
which Chair Powell portrayed as reflective of the conflicting data. Powell acknowledged that the
Fed faced risks to both its full employment mandate and its price stability mandate when it chose
to reduce rates in 2025 and that holding rates constant in December based on the price stability
mandate could also have been justified.50 In Powell’s view, inflation had not returned to 2% in
2025 largely because of the tariffs, but he expected that it would once the tariffs’ effects on prices
fell out of the data in the second half of 2026.51 Therefore, in his view, “in recent months, the
balance of risks has shifted” to employment risks relative to price stability risks.52 On the other
hand, the longer that inflation remains above target, the more entrenched higher inflationary
expectations could become among the general public. The Fed’s decisions to cut rates since 2024
even though inflation has continually exceeded its target since 2021 may decrease the credibility
of its target and its commitment to achieving it in the public’s eyes, thereby increasing inflation
expectations. Some economists have expressed concerns that the “last mile” of inflation reduction
will be the hardest.53 The Fed always has the option to raise rates if inflation remains above
46 Federal Reserve, “Federal Reserve Issues FOMC Statement,” press release, December 10, 2025,
https://www.federalreserve.gov/newsevents/pressreleases/monetary20251210a.htm.
47 Unemployment, jobs, and CPI data is produced by the Bureau of Labor Statistics (BLS). President Trump removed
the BLS Commissioner, a position which has traditionally been filled by a nonpolitical expert and has not been
replaced before their term expired, in August 2025. On social media, he reportedly stated that he removed her for
releasing “rigged” job figures to “make the Republicans, and ME, look bad.” See Natalie Sherman, “Trump Fires Lead
Official On Economic Data As Tariffs Cause Market Drop,” BBC, August 2, 2025, https://www.bbc.com/news/articles/
cvg3xrrzdr0o.
48 The recent sharp decline in net migration could also affect inflation, but its effect is more ambiguous because it
affects both supply and demand.
49 Anton Cheremukhin, “Break-Even Employment Declined After Immigration Changes,” Dallas Fed Economics,
October 9, 2025, https://www.dallasfed.org/research/economics/2025/1009.
50 Federal Reserve, “Transcript of Chair Powell’s Press Conference,” December 10, 2025,
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20251210.pdf.
51 Federal Reserve, “Transcript of Chair Powell’s Press Conference,” December 10, 2025.
52 Federal Reserve, “Transcript of Chair Powell’s Press Conference,” December 10, 2025.
53 See Steven B. Kamin and John M. Roberts, “How Will the Interaction of Wages and Prices Play Out in the Last Mile
of Disinflation?,” American Enterprise Institute, July 2024, https://www.aei.org/wp-content/uploads/2024/07/Kamin(continued...)
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target, but it might be reluctant to do so, because it tries to avoid frequent and sudden reversals in
policy. Therefore, moving to a neutral monetary policy before inflation returns to target runs the
risks of inflation remaining above target for a more extended period.
The other main risk in moving monetary policy to what Powell described as “within a range of
plausible estimates of neutral”54 stems from the fact that there is considerable uncertainty
surrounding what interest rate is consistent with a neutral policy.55 The neutral interest rate is not
directly observable—it is conceptual and can only be estimated using an economic model. Thus,
the estimate is only as good as the model and its assumptions. Current rates are roughly neutral
according to one well-known model tracked by the New York Fed,56 but that model also estimates
a large decline in the neutral rate following the 2008 financial crisis compared to the preceding
period going back continuously as far as first estimated in 1961. A key question moving forward
is whether the historically low-interest rate environment that the economy was in from the
financial crisis through the pandemic has persisted or whether the higher interest rates that have
prevailed since inflation rose are indicative of a return to higher neutral rates than in the 20082020 period. If the neutral rate is higher than estimated and more comparable to the pre-2008
period, then current policy is stimulative rather than neutral, which would be expected to increase
inflation further above target and to lower unemployment.
Working against the Fed’s more stimulative policy since September 2024 is the fact that longterm rates—such as 30-year fixed mortgage rates and 10-year Treasury yields—have shown no
downward trend in response to lower short-term rates. Much private consumption and investment
spending is more sensitive to long-term rates than short-terms rates. This development
underscores the limits of the Fed’s influence over economic activity.
Policy issues for Congress going forward could include the following:
•
•
•
Will with lower rates prevent the Fed from successfully restoring price stability?
Has the Fed appropriately prioritized the return to price stability? Is the Fed
correct that the tariffs’ effects on inflation are temporary and therefore interest
rates do not need to be raised to offset their inflationary effects? Can rate cuts
reverse the slowdown in job growth?
Are high long-term rates undermining the Fed’s attempt to provide monetary
stimulus through low short-term rates? What can Congress do for U.S. businesses
and households that are negatively affected by higher interest rates? Would
actions to assist them make it harder to achieve price stability?
Could price stability be restored more quickly if monetary tightening is
accompanied by tighter fiscal policy? Would tighter fiscal policy lead to higher
unemployment or help reduce long-term interest rates, complementing lower
short-term rates?
Roberts-Prices-and-Wages-WP.pdf; and Randal J. Verbrugge, “Inflation’s Last Half Mile: Higher for Longer?,”
Federal Reserve Bank of Cleveland, May 30, 2024, https://www.clevelandfed.org/publications/economic-commentary/
2024/ec-202409-inflations-last-half-mile.
54 Federal Reserve, “Transcript of Chair Powell’s Press Conference,” December 10, 2025.
55 Based on the FOMC’s economic projections, assuming a 2% inflation rate, in real terms, FOMC officials believe the
neutral rate is somewhere between 0.5% and 2%. At the current inflation rate, the FFR in December 2025 was near the
bottom of that range. See Federal Reserve, Summary of Economic Projections, December 10, 2025,
https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20251210.pdf.
56 Estimates are available at https://www.newyorkfed.org/research/policy/rstar.
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•
Has the Fed’s decision to reduce interest rates as the President has demanded
undermined its perceived independence? If so, will that make it more likely that
lower interest rates will result in higher inflation?
For more information, see CRS Insight IN12635, Federal Reserve Cuts Interest Rates in Late
2025, by Marc Labonte.
The Fed’s Balance Sheet After QE and QT
The Fed’s balance sheet can be described in standard accounting terms. Like any company, the
Fed holds assets on its balance sheet that are equally matched by the sum of its liabilities and
capital. The Fed’s assets are primarily Treasury securities and mortgage-backed securities (MBS)
acquired through open market operations.57 Its assets also include discount window loans, loans
and assets held by its other emergency facilities, and repos lent to the private sector through its
SROs. Its liabilities are primarily currency, reverse repos borrowed from the private sector, bank
reserves held in master accounts at the Fed, and balances that Treasury holds at the Fed.58 When
the Fed purchases assets or makes loans, its balance sheet gets larger, which is matched
predominantly by growth in two of its liabilities—reverse repos and bank reserves.
Twice in its history—during the 2007-2009 financial crisis and the COVID-19 pandemic—the
Fed has lowered the FFR target range to 0%-0.25% (called the zero lower bound) in response to
unusually severe economic disruptions. Because the zero lower bound prevented the Fed from
providing as much conventional stimulus as desired to mitigate these crises, it turned to
unconventional monetary policy tools in an effort to reduce longer-term interest rates. Under this
policy (popularly called quantitative easing, or QE), it purchased trillions of dollars of primarily
Treasury securities and MBS in an effort to directly lower their yield. As a result, the Fed’s
balance sheet grew significantly in three rounds of purchases from 2008 to 2014 and then again
when it made purchases from 2020 to 2022 (see Table 1).59 The Fed’s balance sheet expanded
from $4.7 trillion in March 2020 to $7 trillion in May 2020 to a high of almost $9 trillion in May
2022. At that point, nearly $5.8 trillion of its assets were held in Treasury securities and $2.7
trillion in MBS, and about $3.4 trillion of its liabilities were held in bank reserves and $2.2
trillion in reverse repos. At its peak, the balance sheet was around 10 times larger than it was
before 2009.
Table 1. Federal Reserve Balance Sheet Trends
Trillions of Dollars, 2008-2025
Event (Dates)
End Size
Change
Financial Crisis (9/08-12/08)
$2.2
+$1.3
QE1 (3/09-5/10)
$2.3
+$0.4
57 Except in emergencies, the Fed is allowed to purchase only a limited range of securities, including securities issued
or guaranteed by the government or government agencies (12 U.S.C. §355). The Fed considers MBS guaranteed by
government-sponsored enterprises to qualify. Congress has placed no limit on the amounts of eligible securities it may
purchase.
58 Reserves are assets held as liquid balances (in cash or at the Fed), as opposed to funds invested in loans or securities.
59 The balance sheet also increases when the Fed provides credit to banks and other financial market participants, which
are assets on the balance sheet. In both crises, this played a significant role in the initial increase in the balance sheet,
but credit outstanding fell quickly as financial conditions normalized. For more details on the balance sheet, see Federal
Reserve, “Credit and Liquidity Programs and the Balance Sheet: Recent Balance Sheet Trends,”
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm.
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Event (Dates)
End Size
Change
QE2 (11/10-7/11)
$2.9
+$0.6
QE3 (10/12-10/14)
$4.5
+$1.7
Roll Off (9/17-8/19)
$3.8
-$0.7
Repo Turmoil (9/19-2/20)
$4.2
+$0.4
COVID-19 Response (3/20-3/22)
$8.9
+$4.8
QT (6/22-12/25)
$6.5
-$2.4
Source: CRS calculations based on Federal Reserve data.
Note: In dates not shown in chart, the balance sheet was neither growing nor shrinking.
The goals of QE were to reduce long-term interest rates and provide additional liquidity to the
financial system. QE reduced long-term interest rates by driving down yields on the securities the
Fed was purchasing, which led to lower interest rates throughout the economy.60 (Following the
financial crisis, the Fed concentrated its purchases in long-term securities. Following the
pandemic, the Fed purchased securities across the maturity spectrum so that the disproportionate
effect on long-term rates would be diminished.) The reduction in yields on MBS translated to
lower mortgage rates, stimulating housing demand. QE increased liquidity by increasing bank
reserves.
As part of its efforts to tighten monetary policy, the Fed began to taper its asset purchases (i.e., it
reduced the growth rate of the balance sheet) in November 2021 and ended its purchases (i.e., it
kept the size of the balance sheet steady) in March 2022. In statements in January and May 2022,
the Fed laid out its long-term goals for the balance sheet.61 In the long run, the Fed intends to hold
primarily Treasury securities, eventually eliminating its MBS holdings. It intends to permanently
maintain a large balance sheet, which is consistent with its “ample reserves” framework62 for
monetary policy, and “intends to slow and then stop the decline in the size of the balance sheet
when reserve balances are somewhat above the level it judges to be consistent with ample
reserves.”63 When complete, this is sometimes referred to as an ample reserves framework, as
opposed to the pre-crisis scarce reserves framework or post-crisis abundant reserves framework.
The Fed began to reduce the size of its balance sheet in June 2022, popularly called quantitative
tightening (QT). This reduction was passive—the Fed did not sell any securities. Instead, the Fed
did not replace maturing assets with new asset purchases up to a monthly cap.64 Gradually, the
Fed reduced the rate at which the balance sheet was shrinking until it decided to end QT on
December 1, 2025, amid signs that bank reserves were less plentiful.65 At that point, the balance
sheet was $6.5 trillion, with $4.2 trillion in Treasury securities and $2.1 trillion in MBS. Although
some natural growth in the balance sheet would be expected, as the economy was growing and
prices were rising, QT reversed only about half of the balance sheet growth that occurred since
60 When the price of a debt security rises, its effective yield falls. New debt can then be sold at the prevailing lower
yield.
61 Federal Reserve, “FOMC Communications Related to Policy Normalization,” https://www.federalreserve.gov/
monetarypolicy/policy-normalization.htm.
62 See the section above titled “The Post-Financial Crisis Monetary Policy Framework.”
63 Federal Reserve, “FOMC Communications Related to Policy Normalization.”
64 Treasury redemptions hit the monthly cap, but MBS redemptions were typically lower as households held on to
mortgages with low fixed rates.
65 Roberto Perli, “Money Market Conditions and the Federal Reserve’s Balance Sheet,” speech, Federal Reserve Bank
of New York, November 12, 2025, https://www.newyorkfed.org/newsevents/speeches/2025/per251112.
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the pandemic. Bank reserves were also more than $1 trillion higher than immediately before the
pandemic balance sheet expansion.
Moving forward, the Fed plans to roll over all maturing Treasury securities and MBS into new
Treasury securities, causing its holdings of MBS to gradually decline.66 It also plans to buy and
sell Treasury securities to match fluctuations in demand for bank reserves in order to keep bank
reserves ample.67 Although demand fluctuates based on seasonal factors, such as tax payments,
over time the Fed expects demand for reserves to grow because of factors such as inflation and
economic growth. Therefore, the balance sheet is expected to grow over time, with an increase in
Treasury securities of $40 billion in the first month. Although not intended to be stimulative, the
initial “reserve management purchases,” if continued at that pace, are relatively large—larger
than the Fed’s tapered purchases right before QE ended in 2022, for example. For liabilities, the
Fed held $2.9 trillion in bank reserves, $0.3 trillion in reverse repos (largely by foreign official
institutions), $2.4 trillion in currency, and $0.9 trillion in the Treasury General Account. Reverse
repos by the private sector grew rapidly during the post-pandemic balance sheet expansion and
then fell below $10 billion outstanding by the time QT ended, and it remains to be seen whether
the Fed’s repo and reverse repo facilities will see heavy use now that the balance sheet has
leveled off.68
In the 119th Congress, the Senate Homeland Security Committee held hearings on S. 2113, which
would repeal the Fed’s authority to pay interest on bank reserves held at the Fed. Similar
language was offered as an amendment (S.Amdt. 3761 to S.Amdt. 3748) to the Senate’s version
of the FY2026 National Defense Authorization Act (S. 2296). The amendment was not adopted.
Policy issues for Congress going forward could include the following:
•
•
•
•
Did the Fed’s large purchases of Treasury securities compromise its
independence by making it more susceptible to subordinating monetary policy in
order to provide low-cost financing of the federal debt? Do the Fed’s holdings
(and its effect on Treasury yields) make policies that increase the federal debt
more attractive to Congress and the Administration?
Does QE contribute to asset bubbles that have negative implications for financial
stability and wealth inequality? If so, do these costs outweigh the benefits of
providing more stimulus during crises?
To avoid disruptions to Treasury and repo markets, as occurred in the fall of
2019, did the Fed err on the side of leaving the balance sheet unnecessarily large
when it ended QT in December 2025?
Should the Fed ensure that financial institutions do not regularly engage in heavy
use of Fed repos and reverse repos to avoid a permanently outsized presence in
66 Because the MBS held by the Fed are backed mostly by mortgages with interest rates that are lower than current
market rates, borrowers have not been repaying or refinancing those mortgages at a high pace, causing MBS roll-offs to
be low in most months. The Fed reported roll-offs relative to the caps in Federal Reserve Bank of New York, Open
Market Operations During 2022, April 2023, https://www.newyorkfed.org/medialibrary/media/markets/omo/omo2022pdf. For technical reasons, the actual reduction in the balance sheet does not match these caps from month to month.
For an explanation, see Federal Reserve Bank of New York, “The ‘How and When’ of the Fed’s Balance Sheet
Runoff,” September 8, 2022, https://medium.com/new-york-fed/the-how-and-when-of-the-feds-balance-sheet-runoff3c37787fa948.
67 Federal Reserve Bank of New York, “Statement Regarding Reserve Management Purchases Operations,” press
release, December 10, 2025, https://www.newyorkfed.org/markets/opolicy/operating_policy_251210a.
68 Borrowing from the repo facility over time will depend in part on how large of a balance sheet the Fed maintains. A
relatively larger balance sheet will create more liquidity, reducing demand for repo borrowing.
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•
•
•
private repo markets? Or is stigma associated with repo borrowing from the Fed
preventing SROs from becoming an effective market stabilization tool?
Did the Fed’s MBS purchases contribute to making house prices rise out of reach
for first-time buyers? Is the Fed’s withdrawal from the MBS market happening at
an appropriate pace, or should the Fed consider gradually selling its MBS
holdings? Should Congress consider limiting the types of securities, such as MBS
and agency debt, that the Fed is authorized to purchase?
Is it possible or desirable for Congress to limit the Fed’s future use of QE?
Should Congress remove the tools that enable the Fed to maintain a large balance
sheet and operate monetary policy with ample reserves, such as IOR?
For more information, see CRS In Focus IF12147, The Federal Reserve’s Balance Sheet, by Marc
Labonte.
Losses on the Fed’s Balance Sheet
The Fed earns income on its loans, repos, and securities holdings, which, along with fees it
charges, finance its expenses. Its expenses include operating expenses and the interest paid on
bank reserves and reverse repos, two of its main liabilities. The difference between income and
expenses is called net income, which is similar to profits. Net income is used first to pay
statutorily required dividends to shareholders, with the remainder transferred to the Treasury
(called remittances), where they are added to the federal government’s general revenues.69
Because remittances cannot be used to finance additional federal spending, they effectively make
the budget deficit and federal debt smaller than they would otherwise be.
The Fed’s balance sheet consists mostly of longer-term assets and very short-term liabilities.
Typically, longer-term assets have higher yields than short-term liabilities do, so net income is
positive. However, beginning in September 2022, the Fed’s interest expenses exceeded its interest
income, causing net income to be negative and remittances to temporarily fall to near zero. Net
income became negative because interest rates rose sharply in 2022. As a result, the interest rate
the Fed paid on bank reserves and reverse repos became higher than the yield on securities it
acquired when interest rates were much lower. As discussed above, the Fed acquired large
holdings of low-yielding securities through QE during the pandemic.70 Interest expenses rose
from $5.7 billion in 2021 to $102.4 billion in 2022 to a peak of $281.1 billion in 2023.
Remittances had not been zero since 1934.71 From 2023 to the third quarter of 2025, they were
unusually low.72 The yield on the Fed’s assets will eventually exceed the yield on its liabilities
again—either because the Fed will reduce interest rates on its liabilities enough or because lowyielding assets on the Fed’s balance sheet will eventually mature and be replaced by higher
69 If the Fed’s surplus were below its statutory cap, net income could also be used to increase it, but this scenario is
unlikely.
70 For example, at the end of 2024, 85% of its MBS holdings had coupon rates of 3% or lower. Data available at
https://www.newyorkfed.org/data-and-statistics/data-visualization/system-open-market-account-portfolio.
71 In some years, remittances were statutorily required. In years with no statutory requirement, remittances were the
result of positive net income.
72 Net income and remittances for each of the 12 Federal Reserve banks are calculated individually. Because not all 12
banks had negative net income throughout 2023 and 2024, a small balance was remitted to Treasury.
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yielding assets.73 At that point, net income will become positive again. Net income remained
negative until late in 2025, when the federal funds rate was reduced.74
Although Fed losses have reduced federal revenues since September 2022, cumulative federal
revenues over time have still been larger than they would have been if the Fed had not expanded
its balance sheet, which led to unusually large remittances from 2009 to 2022 (see Figure 4).
Beginning in 2009, its net income and remittances increased significantly as a result of its balance
sheet growth caused by QE and low short-term interest rates on its liabilities. Between 2009 and
2022, annual remittances were between $47 billion and $117 billion each year. Before 2009, the
largest annual remittance ever was $35 billion. Moreover, this considers only the direct effect of
QE on the federal budget. If QE returned the economy to full employment faster, that also had a
positive indirect effect on the federal budget.
Figure 4. Fed Net Remittances to Treasury
2000-2025
Sources: Federal Reserve, Annual Report—2024, Table G.10, https://www.federalreserve.gov/publications/2024ar-statistical-tables.htm; Federal Reserve, Federal Reserve Banks Combined Quarterly Financial Reports (Unaudited),
2025:Q3, Table 18, https://www.federalreserve.gov/aboutthefed/files/quarterly-report-20251121.pdf.
Notes: Negative remittances from 2023 to 2025 represent actual remittances plus negative net income. They do
not represent a draw from Treasury; they represent future net income that Treasury will not receive. Data for
73 The Fed does not mark its balance sheet holdings to market, so unrealized losses on assets do not reduce net income
or remittances. So long as the Fed continues to hold its securities to maturity, as planned, the Fed will not realize any
losses through sales of these securities, and the chance that these securities will suffer losses upon maturity is
negligible.
74 By statute, the CFPB is funded through a transfer from the Fed, and there has been disagreement about whether the
Fed can make that transfer while it has negative net income. The Fed has made all requested transfers since it began
running losses, but the Office of Legal Counsel argued in November 2025 that the law only allowed transfers to be
made out of net income. In a broader case about the CFPB, the courts rejected this argument and required the CFPB to
request a transfer from the Fed. See U.S. Department of Justice, Office of Legal Counsel, Memorandum for Russell
Vought, November 7, 2025, https://www.justice.gov/olc/media/1417326/dl; Ebrima Santos Sanneh, “Judge Blocks
Effort to Allow CFPB Funding to Run Out,” American Banker, December 30, 2025, https://www.americanbanker.com/
news/judge-blocks-effort-to-allow-cfpb-funding-to-run-out.
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2025 are for the first nine months. Although the combined net income of the Federal Reserve banks was
negative from 2023 to 2025, some banks had positive net income, which resulted in small remittances to
Treasury.
Partly because of the statutory limit on its surplus, the Fed holds very little capital relative to its
liabilities, and losses since September 2022 have been an order of magnitude larger than its entire
surplus. But unlike a private company, the Fed does not reduce its capital, become insolvent, or
require a capital infusion to maintain solvency in response to losses. Instead, under its accounting
conventions, it registers the losses as a “deferred asset” or negative liability on its balance sheet.75
At the end of the third quarter of 2025, the deferred asset was $243 billion. Positive net income in
future years would be directed to eliminating this deferred asset before remittances to Treasury
resume. In May 2025, the Congressional Budget Office projected that remittances would resume
in FY2030.76
Private companies hold capital to prevent losses from causing insolvency. But unlike with a
private company, the Fed’s recent losses—which exceed its capital—have not affected its ability
to honor its liabilities, and its creditors cannot compel it to declare bankruptcy. The Fed is not a
profit-maximizing institution—its remittances are a byproduct of monetary policy, not the metric
to judge the success of monetary policy. Losses are a sign not of mismanagement but that its
interest-bearing liabilities had higher yields than its interest-bearing assets did. Losses since 2022
have not reduced the confidence of market participants and do not seem to have affected the Fed’s
political independence. If the Fed based monetary policy on concerns about its profits and losses,
this would detract from achieving its statutory mandate of maximum employment and stable
prices.
Policy issues for Congress going forward could include the following:
•
•
•
•
Should the Fed reconsider how it conducts QE to reduce the possibility that
future episodes of balance sheet expansion would ultimately result in losses (e.g.,
by purchasing short-term instead of long-term securities)?
To reduce the possibility of future losses, should the Fed revert to the scarce
reserves operating framework in place before 2008 so that it does not need to pay
interest on reserves and reverse repos in order to target interest rates?77
Should the Fed use conventional accounting standards that would increase
transparency surrounding its financial condition but would require it to
accumulate more capital (through reduced remittances) to absorb potential
losses? Or would conventional accounting standards be inappropriate given its
unique financial status?
Should the CFPB have its own funding source or continue to be funded through
transfers from the Fed? Does the Fed’s temporary shift from a profit-making
entity to a loss-making entity change the rationale for its financing of the CFPB’s
75 In the Fed’s quarterly financial statements, the losses are presented as a deferred asset on the asset side of the balance
sheet. In the weekly balance sheet H.4.1 data release, they are presented as a negative liability (labeled “earnings
remittances due to the U.S. Treasury”) on the liability side of the balance sheet. The deferred asset increases by
combined losses of the Federal Reserve banks that are running losses and does not net out the positive net income from
Federal Reserve banks that are not running losses. The positive net income is remitted to Treasury at the time it
accrues.
76 Congressional Budget Office, Reconciliation Recommendations of the House Committee on Financial Services, May
7, 2025, https://www.cbo.gov/publication/61379.
77 If the Fed reverted to its pre-financial-crisis framework for conducting monetary policy, average profits would be
lower, but losses would also be less likely.
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•
operations? Should Congress clarify whether the CFPB can be funded when the
Fed has negative net income or allow the legal process to play out?
Should Congress raise the statutory limit on the Fed’s surplus to increase the
Fed’s capital stock if it is concerned about losses? Alternatively, should Congress
eliminate the surplus entirely to avoid further use of the surplus as a “pay for” for
unrelated policy changes?78
Mandate Reform and Monetary Policy Strategy
2025 Monetary Policy Strategy Update
Until 2012, the Fed did not have an inflation target, meaning it did not provide public guidance
on how it interpreted its statutory mandate numerically. Since 2012, the FOMC has explained
how it interprets its mandate in its Statement on Longer-Run Goals. It defines stable prices as 2%
inflation, measured as the annual percentage change in the PCE price index. It does not set a
corresponding maximum employment target, because, in the Fed’s view, maximum employment
“is not directly measurable and changes over time owing largely to nonmonetary factors that
affect the structure and dynamics of the labor market.” The Fed aims to meet its target on average
over time, offsetting periods of inflation below 2% with periods above 2%.
After a review, the FOMC announced revisions to its Statement on Longer-Run Goals and
Monetary Policy Strategy on August 27, 2020.79 The 2020 statement provided more detail on how
monetary policy would react to the problems that interest rates had fallen to the zero lower bound
in two consecutive recessions and inflation had fallen below its 2% target for most of the period
from the financial crisis through 2020. It emphasized changes in strategy to make this less likely
in the future, including advocating periods of above-target inflation to follow periods of belowtarget inflation (sometimes called “flexible average inflation targeting”) and—assuming inflation
is low—pledging to lower rates when unemployment is high but not to raise rates when
unemployment is low. The latter approach was unorthodox but compatible with the tendency for
inflation to be low regardless of whether unemployment was low or high from the financial crisis
through 2020. Because inflation was above target instead of below target since 2021, critics argue
that the 2020 revisions are no longer relevant and have instead become counterproductive.80 For
example, with its emphasis on not raising rates when unemployment is high, the 2020 revisions
78 Previous efforts by Congress to prohibit the use of the surplus as a budgetary pay-for have failed because current
Congresses cannot tie the hands of future Congresses. For example, a scorekeeping rule adopted in H.Con.Res. 290 in
the 106th Congress prohibited the scoring of such Fed surplus transfers as a budgetary offset in the Senate. Although
this rule was not repealed, surplus transfers have since been used as offsets.
79 A description of the review is at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policystrategy-tools-and-communications.htm. The 2020 statement is at https://www.federalreserve.gov/monetarypolicy/
review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policystrategy.htm. For more information, see CRS Insight IN11499, The Federal Reserve’s Revised Monetary Policy
Strategy Statement, by Marc Labonte.
80 One study estimated that, as a result of the strategy shift, the Fed delayed raising the FFR from zero by two quarters
and that inflation was 0.3 percentage points higher than it would otherwise be at its peak. Andrew Hodge et al., “U.S.
and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis,” International Monetary
Fund, November 11, 2022, https://www.imf.org/en/Publications/WP/Issues/2022/11/11/U-S-524029; Gauti B.
Eggertsson and Don Kohn, “The Inflation Surge of the 2020s: The Role of Monetary Policy,” Brookings Institution,
August 2023, https://www.brookings.edu/wp-content/uploads/2023/07/WP87-Eggertsson-Kohn_7.25.pdf.
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may have contributed to the Fed’s decision to keep the FFR at zero until inflation had reached
nearly 7%.81
The Fed conducted a new review in 2025 and updated its Statement on Longer-Run Goals and
Monetary Policy Strategy.82 The review did not reconsider the 2% inflation target, but it reversed
many of the changes to the statement made in 2020. Specifically, it eliminated the strategy that
the Fed would pursue high makeup inflation following inflation being too low and the emphasis
on policy not responding to low unemployment unless inflation is high. Describing the latest
review, Powell said that “a key objective has been to make sure that our framework is suitable
across a broad range of economic conditions. At the same time, the framework needs to evolve
with changes in the structure of the economy and our understanding of those changes.”83 With
these changes, the statement reverted to being more a guide to the broad principles underpinning
the Fed’s monetary policy decisions and less a detailed explanation of how monetary policy
would respond in specific scenarios. Although this provides less specific guidance to outside
observers, it may be more robust across a range of potential outcomes.
Dual Mandate
The Fed’s dual mandate provides the Fed with discretion on how to interpret the terms maximum
employment and stable prices and how to achieve those goals. It contains no repercussions if the
goals are missed—as they are whenever the economy enters a recession, as it did most recently in
2020, or when inflation is above target, as it has been since 2021. In practice, the mandate may be
better thought of as a forward-looking guide (i.e., how monetary policy should react when
economic outcomes differ from mandated goals) than a backward-looking benchmark (i.e., what
the consequences are for the Fed when it misses its mandated goals). Unexpected events such as
the pandemic and the war in Ukraine temporarily caused inflation and employment to deviate
from the mandate, but the mandate guides how the Fed should respond when it does while
providing the Fed maximum discretion to decide how to respond.
There is a long-standing debate among economists about what type of central bank mandate and
what monetary policy strategies lead to the best economic outcomes.84 The Fed had been
successful at delivering consistently low and stable inflation over the past three decades—until
2021. Whether its policies or external forces are to blame for intermittent periods where
maximum employment was not achieved during that time is debatable, but the Fed does not seem
better or worse than its international peers at avoiding recessions. Some commentators believe
that a sole goal of price stability would be more effective than the dual mandate at achieving low
inflation and macroeconomic stability on the grounds that the Fed has no influence over
employment in the long run.85 Others believe that full employment should get more weight and
81 Anna Cieslak et al., “Did I Make Myself Clear? The Fed and the Market in the Post-2020 Framework Period,”
Brookings Institution, June 10, 2024, https://www.brookings.edu/wp-content/uploads/2024/05/Cieslak-McMahonPang-_conference-draft.pdf. See also Brookings Institution, “An Agenda for the Federal Reserve’s Review of Its
Monetary Policy Framework,” June 14, 2024, https://www.brookings.edu/events/an-agenda-for-the-federal-reservesreview-of-monetary-policy-framework/.
82 Federal Reserve, 2025 Statement on Longer-Run Goals and Monetary Policy Strategy, August 22, 2025,
https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategy-tools-and-communications-statement-onlonger-run-goals-monetary-policy-strategy-2025.htm.
83 Chair Jerome H. Powell, “Monetary Policy and the Fed’s Framework Review,” speech, August 22, 2025,
https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm.
84 See CRS Report R41656, Changing the Federal Reserve’s Mandate: An Economic Analysis, by Marc Labonte.
85 Thomas Hogan and Alexander William Salter, “The Fed Needs a Single Mandate,” The Hill, July 30, 2022,
https://thehill.com/opinion/finance/3580777-the-fed-needs-a-single-mandate/.
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price stability less.86 The Fed under the past few chairs has argued—and many economists
agree—that the economy has been well served by a dual mandate that balances both parts of the
mandate evenly. In any case, international comparisons suggest that central banks are likely to
react to changes in both unemployment and inflation regardless of whether they have single or
dual mandates.
Inflation Target
Independent of their mandate types, most central banks have adopted some sort of numerical
inflation target or goal, although there is little consistency in how central banks react when actual
inflation deviates from the target. Some economists believe that the Fed’s 2% target is too low,
while others believe it is too high. Some economists believe that a nominal GDP target or some
form of price level targeting would work better than an inflation target. (A pure price level target,
unlike the Fed’s inflation target, would require a period of deflation to reverse price rises that
occur during periods of high inflation.) Those targets would be more complicated, which could
reduce public comprehension of Fed policy and the likelihood that they would be met. Other
economists argue that discretionary monetary policy should be replaced or reduced by a focus on
monetary policy rules87—that is, mathematical formulas that prescribe how interest rates should
be set based on a limited number of economic variables, such as the output gap and inflation.
Rules reduce arbitrary decisionmaking by removing emotion and instincts from policymaking,
but opponents of these types of proposals believe that the need to nimbly react to unexpected
shocks such as the financial crisis or the pandemic makes such proposals irrelevant or
counterproductive in real-world policymaking. If these types of changes are desirable, the Fed
could pursue them internally, or Congress could impose them through legislation.
Policy issues for Congress going forward could include the following:
•
•
•
•
•
Should the current mandate be maintained because it has generally resulted in
effective policymaking under diverse conditions? Would a change to the mandate
strengthen or weaken congressional oversight?
Has the recent period of high inflation strengthened the case for a single mandate
of price stability? Does public displeasure with high inflation suggest that the Fed
should put greater weight on maintaining price stability, even if it comes at the
expense of maximum employment?
Conversely, does the Fed overweight its price stability mandate compared to its
maximum employment mandate? If so, what changes could more appropriately
balance the two?
Should financial stability be added to the Fed’s statutory mandate, or is the Fed
already sufficiently focused on financial stability?
Is the 2% inflation target the best way to achieve the Fed’s price stability
mandate? Should the 2025 strategy review have reconsidered whether 2% is the
best target? Should the Fed clarify how much inflation can deviate from its target
and still be acceptable (e.g., 1%-3%)? Would another measure—such as a
nominal GDP target, a price level target, or a policy rule—be more effective, or
86 Fed Up, “A Full-Employment Economy, A Federal Reserve That Works for Working People,” April 2021,
https://fedupcampaign.org/wp-content/uploads/2021/06/A-Full-Employment-Economy-A-Fed-that-Works-forWorking-People.pdf.
87 Sometimes monetary policy rules are called Taylor rules after the creator of an early rule, economist John Taylor.
See CRS In Focus IF10207, Monetary Policy and the Taylor Rule, by Marc Labonte.
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would those measures needlessly complicate monetary policymaking and reduce
public understanding of the Fed’s intentions?
Bank Regulation
The Fed regulates bank holding companies (BHCs) and thrift holding companies—parent
companies that own most large and small depositories—to try to ensure that they do not pose
safety and soundness risks to their depositories and for other regulatory requirements.88 The Fed
is also the primary prudential regulator of state-chartered banks that have elected to become
members of the Federal Reserve System and most types of U.S. operations of foreign banking
organizations. The Fed approves applications from banks under its jurisdiction, including merger
applications and applications to form new banks.
The Fed has rulemaking, supervisory, and enforcement authorities to carry out its regulatory
responsibilities, and many policy issues involve recent and forthcoming actions using those
authorities. Often in concert with the other banking regulators,89 it promulgates rules and
guidance that apply to banks and examines depository firms under its supervision to ensure that
those rules are being followed and that those firms are conducting business prudently. The Fed’s
supervisory authority includes consumer protection compliance for banks under its jurisdiction
that have $10 billion or less in assets.90
The Fed has also historically had a focus on maintaining financial stability, which the DoddFrank Act made the primary responsibility of the Financial Stability Oversight Council (FSOC),
with certain new duties assigned to the Fed.91 For example, under the Dodd-Frank Act the Fed
regulates large BHCs and systemically important financial institutions for systemic risk, as
discussed in the next section. The Fed coordinates policy with other regulators on FSOC and
through the Federal Financial Institutions Examination Council. The Fed also participates in
intergovernmental fora, such as the Financial Stability Board and the Basel Committee on
Banking Supervision (BCBS, an international forum to devise regulatory standards), alongside
other U.S. agencies.
88 The Fed was assigned regulatory responsibility for thrift holding companies as a result of the Dodd-Frank Act, which
eliminated the Office of Thrift Supervision as the regulator of thrifts. Currently, the Fed regulates five thrift holding
companies that own insurance subsidiaries. For more information on BHCs, see CRS Report R48291, Bank Holding
Companies: Background and Issues for Congress, by Marc Labonte.
89 The federal banking regulatory system is charter based. Federally chartered (national) commercial banks are
regulated by the Office of the Comptroller of the Currency (OCC), and state-chartered commercial banks that do not
join the Federal Reserve System are regulated by the Federal Deposit Insurance Corporation (FDIC). National banks
are required to become members of the Fed, and state banks have the option of becoming members, but the Fed is the
primary regulator of only the latter. A BHC is regulated by the Fed at the holding company level, and its banking
subsidiaries can be regulated by the Fed, FDIC, or OCC, depending on the subsidiaries’ charters. For more information,
see CRS Report R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework, by Marc
Labonte.
90 The Dodd-Frank Act transferred the Fed’s authority to promulgate consumer protection rules to the CFPB, but the
Fed retained supervisory responsibilities for banks under its jurisdiction that have $10 billion or less in assets. Although
the CFPB was created as a bureau of the Fed, the Fed has no authority to select CFPB’s leadership or employees or to
set or modify CFPB policy. The CFPB’s budget is financed by a transfer from the Fed. The amount is set in statute and
cannot be altered by the Fed. For more information, see CRS In Focus IF10031, Introduction to Financial Services:
The Consumer Financial Protection Bureau (CFPB), by Cheryl R. Cooper and David H. Carpenter.
91 FSOC is a council of regulators, including the Fed, headed by the Treasury Secretary. See CRS Report R48739,
Financial Stability Oversight Council: Policy Issues in the 119th Congress, by Marc Labonte.
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There are a number of ongoing regulatory issues of interest to Congress covered in the following
sections. There are also joint regulatory initiatives with other federal financial regulators that are
beyond the scope of this report.
Regulatory Relief
Regulatory relief for banks has been the focus of regulatory and supervisory initiatives since
Michelle Bowman became vice chair for supervision in June 2025. She has stressed the
importance of tailoring regulations to take into account the regulatory burden on banks of various
types and sizes.92 Her priorities are consistent with those of President Trump and the chairs of the
committees of jurisdiction in the 119th Congress.93 They are also consistent with the priorities of
the heads of the FDIC and the Office of the Comptroller of the Currency (OCC)—who were also
selected by President Trump—resulting in several joint rulemaking among the three agencies.
Regulatory relief is intended to reduce the regulatory burden on banks. To the extent that markets
are competitive, these cost savings may be passed on to consumers. However, regulatory relief
may also reduce the benefits and effectiveness of the affected regulations. Regulations are
intended to help achieve the goals of bank policy, which include ensuring the safety and
soundness of the banking system, financial stability, preventing illicit activity, and consumer
protection. Removing regulations could be detrimental to achieving these goals. Policymakers
debate the proper balance between the benefits and costs of regulatory relief.
The Fed under Vice Chair Bowman has pursued regulatory relief through new rulemakings and
guidance, the recission of rulemakings and guidance issued under former Vice Chair Barr (or
before), and supervisory changes.
New rulemakings include:
•
•
•
a final rule reducing the enhanced supplementary leverage ratio (for detail, see
“Large Bank Issues” below);
proposed rules enhancing stress test transparency for large banks (see “Large
Bank Issues” below); and
a joint proposal to permanently reduce the community bank leverage ratio to 8%
and allow a longer grace period (four quarters instead of two) when participating
banks fall below the minimum requirement so long as they do not fall below 7%
and do not use the grace period for more than eight out of 20 quarters.94
Rescinded rules or guidance include:
92 Vice Chair for Supervision Michelle W. Bowman, “Taking a Fresh Look at Supervision and Regulation,” speech,
June 6, 2025, https://www.federalreserve.gov/newsevents/speech/bowman20250606a.htm.
93 See White House, “Regulatory Freeze Pending Review,” January 20, 2025, https://www.whitehouse.gov/
presidential-actions/2025/01/regulatory-freeze-pending-review/; U.S. Congress, Senate Committee on Banking,
Housing, and Urban Affairs, “Scott Announces Banking Committee Priorities for the 119 th Congress,” press release,
January 15, 2025, https://www.banking.senate.gov/newsroom/majority/scott-announces-banking-committee-prioritiesfor-the-119th-congress; and U.S. Congress, House Committee on Financial Services, “Authorization and Oversight
Plan of the Committee on Financial Services,” https://docs.house.gov/meetings/BA/BA00/20250122/117834/HMTG119-BA00-20250122-SD004.pdf.
94 OCC, Federal Reserve, FDIC, “Regulatory Capital Rule: Revisions to the Community Bank Leverage Ratio
Framework,” 90 Federal Register 228, December 1, 2025, https://www.fdic.gov/board/npr-cblr-npr-frn-2025.pdf.
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•
•
•
a joint notice of proposed rulemaking to rescind the 2023 Community
Reinvestment Act modernization rulemaking and reinstate the framework that
existed prior to the 2023 rulemaking,95
joint climate risk management guidance for large banks (see “Climate Change”
below), and
various guidance that effectively limited banks’ involvement in crypto activities
(see “Crypto and Banking” below).
Supervisory changes include:
•
•
•
•
•
supervisory guidance that the Fed was removing references to reputational risk
from its risk management guidelines,96
supervisory staff cuts at the board (see “Fed Supervision” below),
changing the Fed’s rating system for large financial institutions (see “Fed
Supervision” below),
an internal memorandum directing supervisors to change their approach to
supervision (see “Fed Supervision” below), and
the elimination of a supervisory group dedicated to banks’ novel activities (such
as financial technology and crypto; see “Crypto and Banking” below).97
Vice Chair Bowman has also called for reducing delays in the bank merger approval process.98
The Fed’s (and OCC’s) approval of the Discover–Capital One merger to form the eighth-largest
U.S. BHC occurred after Barr stepped down as vice chair.
Two other dynamics have also facilitated regulatory relief. First, the bank regulators are in the
midst of a statutorily mandated periodic review to “identify outdated or otherwise unnecessary
regulatory requirements” with the goal of reducing regulatory burden.99 This review will likely
culminate in rulemaking to provide targeted regulatory relief across a number of bank regulatory
requirements.
Second, the Supreme Court’s 2024 Loper decision overturning the Chevron doctrine ended
judicial deference to “reasonable agency interpretations of an ambiguous statute.” This decision
may lead to more—and possibly more successful—legal challenges by banks to regulations.100 An
95 OCC, Federal Reserve, FDIC, “Community Reinvestment Act Regulations,” 90 Federal Register 34086, July 18,
2025. A version of the March announcement can be found at https://occ.gov/news-issuances/news-releases/2025/nr-ia2025-26.html.
96 Federal Reserve, “Federal Reserve Board Announces That Reputational Risk Will No Longer Be a Component of
Examination Programs in Its Supervision of Banks,” press release, June 23, 2025, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20250623a.htm.
97 Federal Reserve, “Federal Reserve Board Announces It Will Sunset Its Novel Activities Supervision Program and
Return to Monitoring Banks’ Novel Activities Through the Normal Supervisory Process,” press release, August 15,
2025, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20250815a.htm.
98 Governor Michelle W. Bowman, “Bank Mergers and Acquisitions, and De Novo Bank Formation: Implications for
the Future of the Banking System,” speech, April 2, 2024, https://www.federalreserve.gov/newsevents/speech/
bowman20240402a.htm.
99 Section 2222 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (P.L. 104-208, 12 U.S.C.
§3311) requires the bank regulators to conduct this review every 10 years. The review culminates with a report to
Congress, likely to be released in 2027. The regulators maintain a website tracking this process at
https://egrpra.ffiec.gov/.
100 See CRS Report R48320, Loper Bright Enterprises v. Raimondo and the Future of Agency Interpretations of Law,
by Benjamin M. Barczewski.
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early example of how Loper may change the Fed’s approach to regulation were two developments
at the end of 2024. First, the Fed announced that “due to the evolving legal landscape,” it planned
to submit future annual large bank stress tests—which have been conducted in various forms
without rulemaking since 2009—to the rulemaking process. Second, bank trade groups filed a
lawsuit to require the Fed to submit documents related to future stress tests to the rulemaking
process and vacate recent stress testing documents that were not subject to the rulemaking
process.101
Policy issues for Congress going forward could include the following:
•
•
•
•
•
Will regulatory relief increase the number of bank failures, imposing costs on
taxpayers via federal deposit insurance? Are the small number of bank failures
since 2015 (less than 10 per year) a sign that reforms to safety and soundness
regulation after the financial crisis have been effective or a sign that they have
been overly restrictive?
Have unduly burdensome regulations undermined bank competitiveness in core
lending markets? Has this increased systemic risk by pushing activity into less
regulated nonbank financial institutions?
Should all regulations be tailored to limit the regulatory burden on small banks?
Is ad hoc tailoring on a case-by-case basis optimal, or should Congress formalize
or prohibit tailoring?
If the pace of bank mergers were to increase, would this make the banking
system more or less competitive? Should bank regulators reduce the time and
burden associated with the merger approval process?
Should Congress legislate to restore deference to agencies, or does the Loper
decision properly shift authority from agencies to the courts?
For more information, see CRS In Focus IF10162, Introduction to Financial Services:
“Regulatory Relief”, by Marc Labonte.
Large Bank Issues
The 2007-2009 financial crisis highlighted the problem of “too big to fail” (TBTF) financial
institutions—the concept that the failure of large financial firms could trigger financial instability,
which in several cases prompted extraordinary federal assistance to prevent their failure. Title I of
the 2010 Dodd-Frank Act (P.L. 111-203) aimed to increase financial stability and end TBTF by
creating an enhanced prudential regulatory (EPR) regime administered by the Fed that applies to
large banks and to nonbank financial institutions designated by FSOC as systemically important
financial institutions. Since enactment, the number of designated nonbank firms has ranged from
four to none today.102
101 Federal Reserve, “Due to Evolving Legal Landscape and Changes in the Framework of Administrative Law, Federal
Reserve Board Will Soon Seek Public Comment on Significant Changes to Improve Transparency of Bank Stress Tests
and Reduce Volatility of Resulting Capital Requirements,” press release, December 23, 2024,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm; Bank Policy Institute v. Board of
Governors of the Federal Reserve System, Case: 2:24-cv-04300-EAS-CMV, Doc #: 1, https://bpi.com/wp-content/
uploads/2024/12/BPI-OHChamber-OHBankers-ABA-Chamber-Stress-Testing-Complaint-2024.12.24.pdf.
102 See CRS Insight IN10982, After Prudential, Are There Any Systemically Important Nonbanks?, by Marc Labonte
and Baird Webel.
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Under this regime, the Fed is required to apply a number of safety and soundness requirements to
large banks that are more stringent than those applied to smaller banks and are intended to
mitigate systemic risk:
•
•
•
•
•
•
•
Stress tests and capital planning are designed to ensure that banks hold enough
capital to survive a crisis. Stress tests are conducted by both the Fed and the
banks.
Resolution plans (“living wills”) provide plans to safely wind down failing
banks.
Liquidity requirements are designed to ensure that banks are sufficiently liquid
if they lose access to funding markets.
Counterparty limits restrict banks’ exposure to counterparty default.
Risk management standards require publicly traded companies to have risk
committees on their boards and banks to have chief risk officers.
Financial stability requirements provide for regulatory interventions that can be
taken only if a bank poses a threat to financial stability.
Capital requirements require large banks to hold more capital than other banks
do to potentially absorb unforeseen losses. These include the supplementary
leverage ratio. The eight banks that have been designated as global systemically
important banks (G-SIBs) by the Financial Stability Board must also meet a GSIB capital surcharge and a (higher) enhanced supplementary leverage ratio
(eSLR). Stress test results determine how much capital large banks must hold
through the stress capital buffer.
The Dodd-Frank Act automatically subjected all BHCs and foreign banks operating in the United
States with more than $50 billion in assets to EPR. In 2018, the Economic Growth, Regulatory
Relief, and Consumer Protection Act (P.L. 115-174) created a more tiered and tailored EPR
regime for banks. It eliminated most EPR requirements for banks with assets between $50 billion
and $100 billion, with the exception of risk management requirements. G-SIBs and banks that
have more than $250 billion in assets automatically remain subject to all EPR requirements, as
modified. Section 401 of P.L. 115-174 gives the Fed discretion to apply most individual EPR
provisions to banks with between $100 billion and $250 billion in assets on a case-by-case basis
only if the provisions would promote financial stability or the institution’s safety and
soundness.103 Under the Fed’s 2019 implementing rules, large banks are placed into four
categories based on their size and complexity, and progressively more stringent requirements are
imposed on them.104 The rule also applied EPR to foreign banks with large U.S. operations and
103 Members of Congress debated whether P.L. 115-174 and the Fed’s implementing rule in 2019 contributed to SVB’s
failure. Because SVB was under $250 billion in assets when it failed, it was never subject to EPR requirements
applying to Category III banks. SVB had over $100 billion in assets in 2020, but the Fed phased in compliance with
those requirements slowly when a bank crossed the threshold, so SVB was never subject to EPR requirements applying
to Category IV banks before it failed. Even if it had been subject to these rules, it is questionable whether most of them
would have addressed the specific causes of SVB’s failure. For more information, see the section titled “Role of EPR in
2023 Bank Failures” in CRS Report R47876, Enhanced Prudential Regulation of Large Banks, by Marc Labonte.
104 Federal Reserve, “Federal Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic and Foreign
Banks to More Closely Match Their Risk Profiles,” press release, October 10, 2019, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20191010a.htm; Federal Reserve, “Federal Reserve Board Issues Final Rule Modifying
the Annual Assessment Fees for Its Supervision and Regulation of Large Financial Companies,” press release,
November 19, 2020, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201119a.htm; Federal Reserve,
FDIC, and OCC, “Agencies Issue Final Rule to Strengthen Resilience of Large Banks,” press release, October 20,
(continued...)
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large savings and loan (thrift) holding companies that are not predominantly engaged in insurance
or nonfinancial activities.105 Members of Congress debated whether P.L. 115-174 and the Fed’s
2019 implementing rule contributed to the failure of Silicon Valley Bank (SVB) in 2023, which
was above the pre-2019 asset threshold but below the current threshold.106
Earlier proposed rules that face an uncertain fate under new leadership include:
•
•
•
The federal banking regulators issued a joint proposal to implement the “Basel III
Endgame” in July 2023 for banks with $100 billion or more in assets. The
proposal would implement the BCBS’s 2017 “Endgame” proposal along with
certain other changes in response to issues that arose when three large banks
failed in 2023. According to the proposal, its purpose is to improve the
consistency of capital requirements across banks, better match capital
requirements to risk, reduce their complexity, and improve transparency of
banks’ financial conditions for supervisors and the public. The proposal would
also require banks with over $100 billion in assets to include unrealized capital
gains and losses on available-for-sale debt securities in calculating their capital
levels. Unrealized capital losses were one of the primary causes of SVB’s failure
in 2023. The proposal would also extend two capital requirements—the
supplementary leverage ratio and countercyclical capital buffer—to all banks
with over $100 billion in assets.107 Vice Chair Bowman testified, “Finalizing
Basel III is an important act of closure for the banking sector,” but she signaled
that she intended to make changes from the proposal.108
On the same day, in a separate proposal, the Fed proposed changing how the GSIB surcharge is calculated to “improve the precision of the G-SIB surcharge and
better measure systemic risk.”109
In August 2023, the banking regulators proposed subjecting all banks with $100
billion or more in assets to long-term debt requirements and clean holding
company requirements to facilitate orderly liquidation in the event of a bank’s
failure.110
2020, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201020b.htm; Federal Reserve and FDIC,
“Agencies Finalize Changes to Resolution Plan Requirements; Keeps Requirements for Largest Firms and Reduces
Requirements for Smaller Firms,” press release, October 28, 2019, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20191028b.htm.
105 For a summary of the rule, see Federal Reserve, “Requirements for Domestic and Foreign Banking Organizations,”
https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-visual-20191010.pdf.
106 For more information, see CRS Insight IN12129, Silicon Valley Bank, Signature Bank, and P.L. 115-174: Part 1
(Background and Policy Options), by Marc Labonte.
107 For more information, see CRS Report R47855, Bank Capital Requirements: Basel III Endgame, by Marc Labonte
and Andrew P. Scott.
108 CQ Congressional Transcripts, “House Financial Services Committee Holds Hearing on Oversight of Prudential
Regulators,” December 2, 2025, https://plus.cq.com/doc/congressionaltranscripts-8361133?1.
109 The proposal was published in the Federal Register in September 2023. Federal Reserve, “Regulatory Capital Rule:
Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies; Systemic Risk Report
(FR Y-15),” 88 Federal Register 60385, September 1, 2023, https://www.govinfo.gov/content/pkg/FR-2023-09-01/pdf/
2023-16896.pdf.
110 OCC, Federal Reserve, and FDIC, “Long-Term Debt Requirements for Large Bank Holding Companies, Certain
Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions,” 88
Federal Register 64524, September 19, 2023, https://www.govinfo.gov/content/pkg/FR-2023-09-19/pdf/202319265.pdf. The proposal also makes technical changes to the TLAC rule. For a comparison, see Davis Polk,
(continued...)
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Recent proposed or final rules—in some cases issued jointly with other bank regulators—that
would modify large bank regulatory requirements include111:
•
•
•
In April 2025, the Fed issued a proposed rule modifying the large bank stress test
process. It would base capital requirements on the past two years of stress test
results, reducing the volatility of their year-to-year capital requirements. It would
also give these banks an additional three months to meet the annual capital
requirements and reduce data reporting requirements.112 In October 2025, the Fed
issued a proposed rule to make the 2026 bank stress test scenarios, framework,
and models subject to notice and comment, with a commitment to seek similar
notice and comment in future years.113
In November 2025, the banking agencies rescinded guidance on climate-related
financial risk management for banks with over $100 billion in assets.114
In November 2025, the banking agencies issued a joint final rule reducing the
eSLR for G-SIBs. At the holding company level, the rule reduces the eSLR from
5% to 3% plus 50% of the G-SIB’s Method 1 capital surcharge. For the
depository subsidiaries, the rule reduces the eSLR from 6% to no more than
4%.115 The agencies argue that the rule will “help ensure that the enhanced
supplementary leverage ratio standards serve as a backstop to risk-based capital
requirements rather than a frequently binding constraint, thus reducing potential
disincentives for GSIBs and covered depository institutions to participate in lowrisk, low-return activities,” such as Treasury market making.116 Improved market
making could make Treasury markets less fragile, which has been a focus of
policymakers for several years.117 But the rule does not directly change the
capital treatment of Treasury securities, and lower capital requirements could
also make the G-SIBs more likely to fail and cause financial instability.
In the 119th Congress, the House Financial Services Committee ordered to be reported an
amendment in the nature of a substitute to H.R. 6553,118 which would increase the asset
thresholds for EPR from $100 billion to $150 billion and from $250 billion to $370 billion with
subsequent adjustments every five years based on the growth of nominal GDP. The committee
“Comparison of the Long-Term Debt Proposal to the Existing TLAC Rule,” September 5, 2023,
https://www.davispolk.com/sites/default/files/2023-09/comparison-of-LTD-proposal-and-TLAC-rule.pdf.
111 The Fed has also made changes to the supervision of large banks in 2025. See the section titled “LFI Reform.”
112 Federal Reserve, “Federal Reserve Board Requests Comment on a Proposal to Reduce the Volatility of the Capital
Requirements Stemming from the Board’s Annual Stress Test Results,” press release, April 17, 2025,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20250417a.htm.
113 Federal Reserve, “Federal Reserve Board Requests Comment on Proposals to Enhance the Transparency and Public
Accountability of Its Annual Stress Test,” press release, October 24, 2025, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20251024a.htm.
114 See the section below titled “Climate Change.”
115 Federal Reserve, FDIC, and OCC, “Agencies Issue Final Rule to Modify Certain Regulatory Capital Standards,”
joint press release, November 25, 2025, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20251125b.htm. For more information, see CRS In Focus IF13078, Bank Capital Requirements and Treasury
Market Resiliency, by Marc Labonte.
116 Federal Reserve, FDIC, and OCC, “Agencies Issue Final Rule to Modify Certain Regulatory Capital Standards.”
117 For more information, see CRS In Focus IF13078, Bank Capital Requirements and Treasury Market Resiliency, by
Marc Labonte.
118 Available at https://docs.house.gov/meetings/BA/BA00/20251216/118780/BILLS-119-HR6553-B001282-Amdt15.pdf.
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also ordered to be reported an amendment in the nature of a substitute to H.R. 5270,119 which
would codify stress-test disclosures similar to those that the Fed proposed in 2025.
Policy issues for Congress going forward could include the following:
•
•
•
•
•
•
Has the Dodd-Frank Act, as amended, effectively mitigated TBTF? Or do large
banks pose more systemic risk now than they did at the time of enactment? If so,
are complementary or alternative policy approaches needed to address TBTF?
How much additional regulation for large banks is consistent with a “level
playing field” when TBTF is a factor?
Did the 2019 changes to EPR better tailor EPR to match the risks posed by large
banks? Or did these changes allow additional systemic and taxpayer risk that
outweigh the benefit of reduced regulatory burden, especially if the benefits have
accrued mainly to the affected banks? Should Congress revisit the scope or
applicability of EPR—such as the asset threshold for mandatory application of
EPR and the exemption of large banks without holding companies—following
the large bank failures of 2023?
Should annual supervisory stress tests be subject to the rulemaking process? Is
there sufficient transparency surrounding these stress tests? Or would greater
transparency be akin to giving banks the answers to the exam in advance?
If one wanted to ensure that risk-weighted capital requirements are binding,
should risk-weighted capital requirements be raised, or should leverage
requirements such as the eSLR be lowered?
Is reducing the eSLR the best way to ensure that banks are not disincentivized to
hold Treasury securities? Or would a better approach be to exempt Treasury
securities from all leverage requirements for all banks? Or are Treasury markets
already sufficiently resilient to not merit a reduction in capital requirements?
Should the Fed repropose the Basel Endgame rule to meet international
commitments? Or are existing capital requirements adequately addressing risk at
large banks? Should Congress have more input on internationally negotiated
regulatory standards?
For more information, see CRS In Focus IF12755, “Too Big to Fail” Financial Institutions:
Policy Issues, by Marc Labonte; and CRS Report R47876, Enhanced Prudential Regulation of
Large Banks, by Marc Labonte.
Fed Supervision
When the Fed examines a bank and finds deficiencies in its operations, the Fed can issue a Matter
Requiring Attention (MRA), which provides the bank a written explanation of the problems that
need to be remedied. If a problem is more serious, the Fed can issue a legally binding
Enforcement Action. It can also give the bank a poor rating for one exam component or overall,
which can result in greater supervisory scrutiny and remediation. The Fed periodically presents
aggregate data only on bank ratings and MRAs. (All supervisory information for individual banks
is confidential.) Data in recent years indicate a large number of outstanding MRAs overall. For
large banks specifically, there were a significant number of MRAs per bank as well as a large
number of banks with poor ratings. However, MRAs and supervisory ratings are subject to
119 Available at https://docs.house.gov/meetings/BA/BA00/20250916/118626/BILLS-119-HR5270-H001058-Amdt-
5.pdf.
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examiners’ judgment. Looking at “hard” data, over 99% of banks were well capitalized, and there
have been fewer than 10 bank failures a year since 2015.120 On the other hand, SVB, the thirdlargest failure in history in 2023, was regulated by the Fed. The Fed’s post-mortem report found
that the problems that caused SVB’s failure should have been identified more quickly and dealt
with more aggressively by Fed supervisors.121
Because of the confidential nature of supervision, it is difficult to know what this means for bank
regulatory compliance and the Fed’s supervisory vigilance. Does the large number of less-thansatisfactory ratings and outstanding MRAs imply that banks are rife with reckless behavior,
endangering financial stability? If they are, why has the Fed not taken stronger actions to ensure
the safety and soundness of the financial system? Given that there are thousands of MRAs
outstanding each year, why does the Fed report that the “banking system remains sound and
resilient”?122 Or are banks being unreasonably burdened with trivial, rote, and nebulous
compliance issues that pose no real risk to safety and soundness? Less-than-satisfactory ratings or
outstanding findings are not concentrated in areas directly linked to financial risk, such as capital,
credit risk, and liquidity—although the share is not trivial, especially for the G-SIBs.
Policymakers could potentially respond to the large number of reported problems by directing
examiners to more aggressively induce banks to address them. Alternatively, the number of
reported problems could be reduced by reducing the number of examiners, downgrading
enforcement actions to MRAs and MRAs to informal findings, or directing examiners to report
fewer problems. Vice Chair Bowman has said, “We should be cautious about the temptation to
overemphasize or become distracted by relatively less important procedural and documentation
shortcomings.”123
To date, the Fed has announced three initiatives under her leadership that bear on this issue—
supervisory staff cuts, changing the Fed’s rating system for large financial institutions (LFIs), and
directing supervisors to change their approach to supervision. She has also signaled in testimony
that the Fed “is also considering a regulation that would clarify the standards for enforcement
actions based on an unsafe or unsound practice, Matters Requiring Attention (MRAs), and other
supervisory findings based on threats to safety and soundness” and changes to the management
component of examinations, which is viewed as a more subjective component.124 The Fed also
disbanded a novel activities supervisory group in 2025 that is discussed in the section entitled
“Cryptocurrency and Banking.”
Supervisory Priorities Memorandum
In November 2025, the Fed publicly released an internal memorandum to Fed supervisory staff
on Vice Chair Bowman’s priorities and principles for bank supervision, described as “broad
120 This figure includes all banks regulated by the Fed, FDIC, or OCC. Data available at https://www.fdic.gov/
resources/resolutions/bank-failures/in-brief/index.
121 Federal Reserve, “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank,” April
2023, https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.
122 Testimony of Vice Chair for Supervision Michelle W. Bowman, “Supervision and Regulation,” U.S. Congress,
House Committee on Financial Services, December 2, 2025, https://www.federalreserve.gov/newsevents/testimony/
bowman20251202a.htm.
123 Vice Chair for Supervision Michelle W. Bowman, “Taking a Fresh Look at Supervision and Regulation,” speech,
June 6, 2025, https://www.federalreserve.gov/newsevents/speech/bowman20250606a.htm.
124 Bowman, “Supervision and Regulation.”
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changes to the conduct of [Fed] supervision.”125 The memorandum called for staff to focus on a
firm’s material financial risks and to not be “distracted from this priority by devoting excessive
attention to processes, procedures, and documentation.” It stated that the Fed would be reversing
its current policy of not making nonbinding supervisory observations and suggested making
nonbinding observations in lieu of formal MRAs.126 It directed supervisory staff not to conduct
their own examinations of bank subsidiaries that are already examined by other primary state or
federal regulators and to rely on state examiners in alternate years for state member banks where
the Fed is the primary federal regulator. The memorandum called for expediting the termination
of MRAs based on bank self-certification of validation and stated that MRAs should no longer be
issued for procedural or documentation shortcomings that do not pose material threats to safety
and soundness.
Staff Cuts
In December 2025, Vice Chair Bowman testified that the Fed was planning to reduce staff in the
board’s Division of Supervision and Regulation by 30%.127 Reportedly, this would occur in
2026.128 It is unclear whether this would be in addition to the previously announced 10%
reduction (discussed below) or would be relative to pre-reduction staff levels. Supervisory and
regulatory policy is crafted by the board, but examiners are located in the Federal Reserve banks.
It is unclear whether the banks intend to follow the board’s lead on this staff reduction.
LFI Reform
The Fed categorizes financial institutions under its jurisdiction for supervision based on asset
size. Under the LFI Supervisory Framework, LFIs129 receive ratings of broadly meets
expectations, conditionally meets expectations, deficient-1, or deficient-2 in each of three
categories (capital, liquidity, and governance and controls). Previously, if an institution received a
deficient-1 or deficient-2 rating in any category, then it was not considered to be “well managed”
overall. Well-managed status has implications for regulation, such as the institution’s ability to
operate as a financial holding company, which allows for a wider range of permissible
activities.130 In the past five years, at least half of LFIs have not been considered well managed
each year. The most frequent reason is a deficient-1 or deficient-2 rating in governance and
controls.131
125 Federal Reserve, “Federal Reserve Board Releases Information Regarding Enhancements to Bank Supervision,”
press release, November 18, 2025, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20251118a.htm.
126 Supervisory observations were removed in 2013 to “better focus an organization’s board of directors’ attention on
deficiencies found during the supervision process.” Federal Reserve, “SR 13-13 / CA 13-10: Supervisory
Considerations for the Communication of Supervisory Findings,” June 17, 2013, https://www.federalreserve.gov/
supervisionreg/srletters/sr1313.htm.
127 CQ Congressional Transcripts, “House Financial Services Committee Holds Hearing on Oversight of Prudential
Regulators.”
128 Dylan Tokar and Nick Timiraos, “Federal Reserve to Reduce Bank Supervision Staff by 30%,” Wall Street Journal,
October 30, 2025, https://www.wsj.com/economy/central-banking/federal-reserve-to-reduce-bank-supervision-staff-by30-84fcd65f.
129 U.S. banks with over $100 billion in assets and U.S. intermediate holding companies of foreign banks with over $50
billion in assets are subject to the LFI framework.
130 See CRS Report R48291, Bank Holding Companies: Background and Issues for Congress, by Marc Labonte.
131 Federal Reserve, Supervision and Regulation Report, December 2025, https://www.federalreserve.gov/publications/
2025-december-supervision-and-regulation-report.htm.
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In November 2025, the Fed issued a final rule revising the LFI framework.132 The rule modified
this framework so that an LFI with a deficient-1 rating in one category is now considered well
managed so long as it receives at least a conditionally meets expectations rating in the other
categories. The Fed estimates that under the rule, the number of LFIs that would be considered
not well managed at the holding company level would fall from 17 to 10 (out of 36 total).133 The
rule removed the presumption that one or more deficient-1 ratings would result in the institution
being subject to informal or formal enforcement actions.
Vice Chair Bowman said, “Bank ratings should reflect overall safety and soundness, not just
isolated deficiencies in a single component. These framework changes address this by helping to
ensure that overall firm condition is the primary consideration in a bank’s rating.”134 In a
dissenting vote, Governor Barr stated that the rule “would undermine oversight of the largest 36
banks in the country by allowing poorly managed large banks to be treated as well managed—
granting them privileges meant only for strong, healthy institutions. The changes would increase
risks to individual banks, the financial system, households and businesses, and the broader
economy.”135
Congressional Oversight
Congress has oversight responsibilities for Fed supervision. Statute gives the bank regulators
broad discretion on how to supervise banks. Congress has largely deferred to the Fed on its
supervisory practices in the past, reflecting its status as a highly independent, self-funded agency.
Oversight is also hindered by the fact that most supervisory information from the bank regulators,
such as a bank’s rating, is highly confidential, because bank-specific information could be market
moving. Yet even aggregate, anonymized information is highly limited.136 Legislation in the 119th
Congress has sought to reduce the regulatory burden associated with bank supervision.
Policy issues for Congress going forward could include the following:
•
•
Has bank supervision in recent years been bogged down by excessive
proceduralism and costly requirements that do not meaningfully mitigate material
risk? Or will lighter-touch supervision result in more bank failures and more
violations of consumer protection and illicit finance policies?
Can Congress conduct effective oversight of supervision when little information
on supervision is publicly disclosed?
For more information, see CRS Report R46648, Bank Supervision by Federal Regulators:
Overview and Policy Issues, by David W. Perkins.
132 Federal Reserve, “Revisions to the Large Financial Institution Rating System and Framework for the Supervision of
Insurance Organizations,” 90 Federal Register 219, November 17, 2025, https://www.govinfo.gov/content/pkg/FR2025-11-17/pdf/2025-19945.pdf.
133
Some firms that shifted from not well managed to well managed under the LFI framework may still have
subsidiaries that are classified as not well managed under other frameworks. The rule also makes parallel changes to
the Insurance Supervisory Framework. The Fed supervises five depository holding companies with at least 25% of their
consolidated business in insurance under this framework. The rule would not change the number of institutions that
would be considered well managed under the Insurance Supervisory Framework.
134 Federal Reserve, “Federal Reserve Board Finalizes Changes to Its Supervisory Rating Framework for Large Bank
Holding Companies,” press release, November 5, 2025, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20251105a.htm.
135 Federal Reserve, “Statement on Large Financial Institution Rating Framework by Governor Michael S. Barr,” press
release, November 5, 2025, https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20251105.htm.
136 See CRS In Focus IF12454, Bank Failures and Congressional Oversight, by Marc Labonte.
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Climate Change
The Fed increased its focus on the financial and economic risks posed by climate change in recent
years before reversing course in 2025. In 2020, the Fed joined the Network for Greening the
Financial System, a group of over 80 central banks and regulators focused on climate-related
risks. However, the Fed withdrew from the network in January 2025. In 2021, the Fed created
two internal committees related to climate risk. It disbanded those committees in March 2025.137
Building on existing regulatory practices,138 in October 2023, the Fed and other banking
regulators issued joint final guidance that provided “a high-level framework for the safe and
sound management of exposures to climate-related financial risks” for banks with over $100
billion in assets.139 In November 2025, the banking regulators rescinded this joint guidance.140
In 2023, the six largest banks participated in a Fed-led pilot “climate scenario analysis” to “help
identify potential risks and promote risk management practices.”141 This exercise does not have
any implications for capital requirements or supervision and therefore is not considered by the
Fed to be a stress test. Members of Congress have debated whether large banks should be subject
to “climate stress tests.” Under a true climate stress test, capital requirements would be based in
part on a bank’s exposure to climate risk. One challenge to climate stress testing is that time
horizons are much longer than in current stress tests and subject to significant uncertainty.
Some argue that climate change has implications for economic and financial stability. For
example, a 2021 report from FSOC, of which the Fed is a member, identified climate change as
an emerging and increasing threat to financial stability and made a number of recommendations
for agency actions, which included the actions taken by the Fed.142
Critics argue that due to the gradual nature of climate change, it is unlikely to pose systemic risk,
because financial markets will have time to adjust and reprice assets and credit to reflect higher
disaster risk.143 They are also concerned that climate risk policies will unfairly steer credit away
from fossil fuel and other energy-intensive industries. They argue that climate change policy is
best addressed by Congress and that a focus on climate change distracts the Fed from its mission.
137 Alastair Marsh, “Fed Disbands Climate Groups Studying Financial Stability Risks,” Bloomberg, May 28, 2025,
https://www.bloomberg.com/news/articles/2025-05-28/fed-disbands-climate-groups-studying-financial-stability-risks.
138 In the past, the Fed has stated that climate risk is covered by its existing supervisory guidance on underwriting,
which requires bank management to take into account all relevant risks. Further, it stated that its guidance on managing
risk from extreme weather events is well equipped for managing an increase in extreme weather events caused by
climate change. See Jerome Powell, letter to the Hon. Brian Schatz, April 18, 2019, https://www.schatz.senate.gov/imo/
media/doc/Chair%20Powell%20to%20Sen.%20Schatz%204.18.19.pdf.
139 Federal Reserve, FDIC, and OCC, “Agencies Issue Principles for Climate-Related Financial Risk Management for
Large Financial Institutions,” joint press release, October 24, 2023, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20231024b.htm. In the 118th Congress, the House Financial Services Committee reported H.J.Res.
125, which would have overturned this guidance under the Congressional Review Act.
140
OCC, Federal Reserve, FDIC, “Rescission of Principles for Climate-Related Financial Risk Management for Large
Financial Institutions,” November 18, 2025, https://www.fdic.gov/federal-register-notice-rescission-principles-climaterelated-financial-risk-management-large.pdf.
141 Federal Reserve, “Federal Reserve Board Provides Additional Details on How Its Pilot Climate Scenario Analysis
Exercise Will Be Conducted and the Information on Risk Management Practices That Will Be Gathered over the
Course of the Exercise,” press release, January 17, 2023, https://www.federalreserve.gov/newsevents/pressreleases/
other20230117a.htm.
142 FSOC, “Financial Stability Oversight Council Identifies Climate Change as an Emerging and Increasing Threat to
Financial Stability,” press release, October 21, 2021, https://home.treasury.gov/news/press-releases/jy0426.
143 See, for example, John H. Cochrane, “The Fallacy of Climate Financial Risk,” Project Syndicate, July 21, 2021,
https://www.project-syndicate.org/commentary/climate-financial-risk-fallacy-by-john-h-cochrane-2021-07.
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Policy issues for Congress going forward could include the following:
•
•
Should the Fed be doing more to combat climate change? Or should it be doing
less on the grounds that climate change is outside the Fed’s purview and a
distraction from its statutory duties? If Congress wants the Fed to address climate
change, should those responsibilities be added through legislation? Are U.S.
interests better served inside or outside of the Network for Greening the Financial
System?
Does climate risk expose banks to unmanageable financial risks or the financial
system to systemic risk? If so, can those risks be regulated under general safety
and soundness rules, or are bespoke climate risk regulations needed?
Cryptocurrency and Banking144
Some banks have expressed interest in offering services related to cryptocurrencies and other
digital assets (crypto).145 Participation could take the form of traditional banks providing some
types of crypto services or crypto firms seeking bank charters. Examples of areas where
(traditional or crypto) banks could seek to engage in crypto-related activities include issuing
payment stablecoins, providing custody services, facilitating crypto transactions for customers,
making loans using crypto as collateral, and holding crypto on their own balance sheets.146 In
addition, banks can offer traditional banking services, such as loans or deposit accounts, to
cryptocurrency firms.
Extreme volatility in crypto values and several high-profile scandals involving collapses in crypto
firms, crypto scams, and thefts point to the dangers that crypto could pose for bank safety and
soundness and their customers if risks are not properly managed. As leadership has changed and
crypto markets have risen and fallen (contributing to the liquidation of two banks with crypto
industry exposure, Silvergate and Signature, in 2023),147 federal bank agencies have changed their
positions on the risk-benefit trade-off of crypto. In 2025, the regulatory approach has shifted
again.
In the absence of a statutory framework or bespoke rulemaking to regulate crypto, federal bank
regulators developed guidance and policy to provide clarity to the banking system on permissible
crypto activities over the past decade or so. Approval of crypto activities (like other activities) has
been based on two factors: (1) whether the activity legally is permissible148 and (2) whether it is
compatible with the goals of bank regulation (e.g., whether it can be done in a safe and sound
manner). This framework gives the bank regulators considerable discretion to approve or deny
banks’ efforts to engage in various crypto-related activities.
144 This section draws on material coauthored with Andrew Scott and Paul Tierno.
145 For background, see CRS In Focus IF12405, Introduction to Cryptocurrency, by Paul Tierno.
146 The BCBS is in the process of formulating international capital standards for bank exposures to crypto. Typically,
U.S. bank regulators have implemented BCBS standards through the domestic rulemaking process. BCBS, Second
Consultation on the Prudential Treatment of Cryptoasset Exposures, June 2022, https://www.bis.org/bcbs/publ/
d533.pdf. See also Federal Reserve, FDIC, and OCC, “Joint Statement on Crypto-Asset Policy Sprint Initiative and
Next Steps,” November 23, 2021, https://www.federalreserve.gov/newsevents/pressreleases/files/
bcreg20211123a1.pdf.
147 See CRS Insight IN12148, The Role of Cryptocurrency in the Failures of Silvergate, Silicon Valley, and Signature
Banks, by Paul Tierno.
148 Congress has limited banks’ activities related or incidental to the business of banking. Certain nonbank subsidiaries
of banks and BHCs can also engage in activities that are financial in nature. For more information, see CRS Report
R48291, Bank Holding Companies: Background and Issues for Congress, by Marc Labonte.
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On January 23, 2025, President Trump issued E.O. 14178, “Strengthening American Leadership
in Digital Financial Technology,” to “support the responsible growth and use of digital assets,
blockchain technology, and related technologies.”149 Since the new Administration took office,
each of the federal banking regulatory agencies has updated and rescinded guidance regarding
crypto activities. For example, 2022 joint guidance on crypto risks was withdrawn. This guidance
stated, among other things, that “the agencies believe that issuing or holding as principal cryptoassets that are issued, stored, or transferred on an open, public, and/or decentralized network, or
similar system is highly likely to be inconsistent with safe and sound banking practices.”150 Joint
guidance from 2023 on liquidity risks to banks related to deposits from crypto businesses and
stablecoin reserves was also withdrawn.151
In April 2025, the Fed also rescinded its August 2022 guidance regarding bank involvement in
crypto activity, which had stated that banks it regulates could not engage in crypto activities until
the activities have been explicitly approved by the Fed and complied with all applicable laws.152
Following the recission, the Fed no longer expects banks to provide notification before engaging
in crypto activities but will continue to monitor the activities through the supervisory process.153
The Fed also withdrew guidance from 2023 that (1) “presumptively prohibited” banks from
holding most crypto assets as principal (as opposed to holding it on behalf of a customer) and (2)
limited banks’ ability to issue, hold, or transact in dollar-denominated tokens, such as payment
stablecoins, and required they first received approval from the Fed.154 It is replaced by new
guidance that differentiates between the permissible activities of insured and uninsured state
member banks. It states that activities are permissible for insured member banks if they are
approved for national banks by the OCC or have been approved by the FDIC. For uninsured
banks, the guidance states that only Fed approval is required so long as it does not threaten the
safety and soundness of the bank or financial stability. The OCC and FDIC have also rescinded
guidance and issued new guidance in 2025 that makes it easier for banks (including those
regulated by the Fed) to engage in crypto-related activities.155 For example, the regulators issued
149 Executive Order 14178, “Strengthening American Leadership in Digital Financial Technology,” 90 Federal
Register 8647, January 31, 2025, https://www.federalregister.gov/documents/2025/01/31/2025-02123/strengtheningamerican-leadership-in-digital-financial-technology.
150 Federal Reserve, FDIC, and OCC, “Joint Statement on Crypto-Asset Risks to Banking Organizations,” January 3,
2023, https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20250424a1.pdf.
151 Federal Reserve, FDIC, and OCC, “Joint Statement on Liquidity Risks to Banking Organizations Resulting from
Crypto-Asset Market Vulnerabilities,” February 23, 2023, https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20250424a2.pdf.
152 Federal Reserve, “Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking
Organizations,” August 16, 2022.
153 Federal Reserve, “Federal Reserve Board Announces the Withdrawal of Guidance for Banks Related to Their
Crypto-Asset and Dollar Token Activities and Related Changes to Its Expectations for These Activities,” press release,
April 24, 2025, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20250424a.htm.
154 Federal Reserve, “Federal Reserve Board Withdraws 2023 Policy Statement and Issues New Policy Statement
Regarding the Treatment of Certain Board-Supervised Banks That Facilitates Responsible Innovation,” press release,
December 17, 2025, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20251217a.htm; Federal Reserve,
“Federal Reserve Board Announces the Withdrawal of Guidance.” The rescinded policy statement is Federal Reserve,
“Policy Statement on Section 9(13) of the Federal Reserve Act,” 88 Federal Register 7848, February 7, 2023,
https://www.govinfo.gov/content/pkg/FR-2023-02-07/pdf/2023-02192.pdf.
155 See, for example, OCC, “OCC Letter Addressing Certain Crypto-Asset Activities,” March 7, 2025,
https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2025/int1183.pdf; FDIC, “FDIC
Clarifies Process for Banks to Engage in Crypto-Related Activities,” press release, March 28, 2025,
https://www.fdic.gov/news/press-releases/2025/fdic-clarifies-process-banks-engage-crypto-related-activities.
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a joint statement on crypto-asset safekeeping in July 2025 that explicitly allows for banks to
“provide safekeeping for crypto-assets in a fiduciary or a nonfiduciary capacity.”156
In August 2023, the Fed created a Novel Activities Supervision Program a
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