Written by Karen Shaw Petrou

The FOMC minutes released on Wednesday focused on the top-billing question of a forthcoming interest-rate hike but also included a little-noticed discussion of the condition of U.S. financial regulation. The FOMC concluded not only that post-crisis financial regulation makes the system a lot safer, but also that the FRB may well need to use macroprudential tools that might not work. It might thus need to deploy monetary policy, but this too might not work or prove still more problematic if financial-stability objectives conflict with the central bank’s dual mandate. So, what to do? A new FedFin study concludes that the FRB cannot rest on its microprudential laurels – the macroprudential and monetary-policy problems acknowledged by the FOMC are signs of a larger disconnect in the post-crisis framework. Big banks may well have fortress balance sheets, but the recovery is tepid, markets are volatile, alternative credit providers are in paroxysms, and the Board’s balance sheet is so big that Congress is increasingly contemplating it with hungry eyes.

I knew when we headed into this project that it would face a barrage of skepticism, not least because of funding from The Clearing House. We gratefully acknowledge this not only because it let us take on a project I wanted to do since FedFin in 2011 first spotted potentially perverse consequences of the increasingly complex regulatory framework. The Clearing House also gave FedFin complete editorial and methodological control over the project, ensuring that any of its faults are only our own.

Skepticism of work like this goes deeper, though, than cynicism about who pays for it. In the wake of the cataclysmic financial crisis, it’s no surprise that anything that smacks of regulatory change is characterized as “watering down.” Banks have also done themselves no favors by intra-industry warfare and occasional hyperbole.

But, step back from the rhetoric and the picture isn’t pretty. Yes, the U.S. financial system is on sounder footing than most others, in part because the largest banks here started to clean up their act in concert with their regulators as early as 2009. But, not only is GDP growth lackluster and real unemployment deeply troubling, but we are also in the midst of a profound populist revolt evident most clearly in an election that could throw the U.S. into a political-risk crisis reminiscent of erratic developing countries. If the financial system is as safe as all that, why is growth so mediocre and the nation still so flat-out angry?