Giving the Bank President What He Needs to Do His Job

March 26, 2018

The main mission of the Atlanta Fed’s Research Department is to ensure that the Bank president has a fully informed, nuanced view of the economy to present at meetings of the Federal Open Market Committee, the Fed's monetary policy-setting body.

Understanding the condition of the financial system is important for at least two reasons. First, monetary policy works its way into the real economy through the financial system. Second, financial instability can force the Fed to adopt more accommodative policies—typically lower interest rates—than it would if the financial system were more stable. For example, the country has had very low rates since the 2007–08 financial crisis.

Moreover, the financial crisis created an "all-hands-on-deck" situation at the Fed. Conditions were sufficiently dire that researchers who could help craft policy to stabilize the financial system stepped up to pitch in.

Atlanta Fed economists were no exception. One of their main contributions was in refining the Federal Reserve's comprehensive capital analysis and review (CCAR) process, a key initiative meant to ensure that moving ahead, banks would be strong enough to withstand economic downturns. Atlanta Fed economists helped review the rigor of the models that commercial banks used to show how they would fare in a variety of what-if scenarios devised as part of the CCAR.

This experience in the trenches led Atlanta Fed economists Mark Jensen and Larry Wall to evaluate and suggest improvements to the Fed's bank stress tests and the Basel international standards for measuring bank capital adequacy. Additionally, Atlanta Fed economists helped to review incentive compensation programs for large-banking-company executives and the statistical modeling of banks' holdings of sovereign and municipal debt.

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