The explosive growth of cryptocurrencies and related assets also poses potential risks to the system, particularly the rise of stable coins as an alternate means payment to the dollar.

Create a Digital Dollar?
The takeoff of stablecoins is putting pressure on the Fed to follow the lead of China and issue its own digital currency.

Proponents argue that would help expand access to the financial system to the millions of Americans without a bank account and speed up and lower the cost of transactions. Opponents warn it would risk hollowing out the banking system as money was yanked out of the financial institutions and parked in digital dollars at the Fed.

It’s “a battle for the soul of the financial system,” said former Bank for International Settlements economic adviser and digital-dollar skeptic Stephen Cecchetti.

A decision to go ahead would probably require at least the tacit approval of lawmakers, potentially enmeshing the Fed in politically treacherous terrain.

Repairing the Fed’s Tarnished Reputation
That terrain will be all the more tricky to traverse after the central bank’s reputation as straight-shooting economic steward took a knock with the revelation that some policy makers traded in financial securities while the Fed was aiding the markets and the economy.

The news led to the resignations of the Dallas and Boston reserve bank presidents and the adoption of strict new curbs on trading by top Fed officials, including a ban on the buying of individual stocks and bonds.

This “is a start, but we can’t let up now,” Senate Banking Committee Chair Sherrod Brown, the Ohio Democrat who leads the panel that oversees the Fed, said in a statement after the restrictions were announced on Oct. 21. “The American people need to be able to trust that the Federal Reserve works for them.”

Also hanging over the Fed: an ongoing probe into the trading scandal by its internal watchdog.

Climate Change
The Fed is already caught up in a tug-of-war between Democrats and Republicans over what it can and should do to combat global warming.