Why Warren Buffett Says We ‘Need a Powerful Fed’

A weak Fed could result in excessive inflation.

The Federal Reserve — aka the Fed — is a government agency that determines monetary policy. Every so often, certain groups and elected officials will target the Fed and call its existence and power into question.

One such attack came earlier this year. President Donald Trump’s administration repealed major pieces of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a 2,300-page piece of financial reform passed in 2010 by the Obama administration as a response to the financial crisis of 2008. The rollbacks will ease regulations on small and medium-sized lenders, but potentially open up taxpayers to more liability, according to CNBC.

Click to read more about how the next Fed rate hike will impact you.

In an interview with CNBC’s Andrew Ross Sorkin, Warren Buffett admitted he’s never read Dodd-Frank cover to cover, but from the summaries he read, he has “the impression that it somewhat weakens the ability of the Fed to act promptly and unilaterally … I would say that’s a terrible mistake and we need a powerful Fed.”

Buffett acknowledged that the Fed stands to get a bad rap, but emphasized that “you need somebody.”

Related: Warren Buffett Invested $5B in Goldman During the 2008 Crisis. What’s It Worth Now?

After all, it’s the central bank that is responsible for the changing interest rates on your mortgage, car loans, student loans and credit cards. The Fed wields an incredible amount of power that dictates the amount of money in your pocket, but consumers aren’t the only ones who thrive or suffer at its machinations. Investors and companies looking to borrow money to expand their businesses face higher borrowing costs during Fed hikes, which leaves them with less money to reinvest in the economy and their businesses.

Understand: What Is the Federal Funds Rate and What Does a Rate Hike Mean?

However, to Buffett’s point, a weak Fed would allow the economy to slide into excessive inflation, instead of fine-tuning and manipulating the economy to run like a well-oiled machine.

The Fed’s official duties include:

  • Moderating long-term interest rates
  • Supervising and regulating banking institutions
  • Protecting the credit rights of consumers
  • Maintaining the stability of the financial system
  • Providing financial services to institutions, the government and foreign official institutions

Besides all that, the Fed helps prevents economic chaos from infiltrating the economy by attempting to maximize full employment while mitigating inflation, deflation and other problems.

Click through to read more tips from Buffett that you should be following.

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