The world's most powerful civil servant has more economic influence than anyone, anywhere. The FED Chair leads the American monetary policy process and pushes the button that creates money! Setting FED monetary and economic policy sets the tone that all significant economies follow. That unmatched economic and financial power gives the FED Chair top rank among civil servants and makes the FED and Chair important to investors.
What you learn:
Learn the unique economic and financial role of the FED and Chair in the U.S. FED activity and words of the Chair influences economic, financial, and central bank policy and actions taken around the world. Links at the end of this lesson will guide you to related lessons to learn more.
FAQ investors ask about the FED Chair
Why is the FED Chair so powerful?The world's most powerful civil servant, the FED Chair, has more economic influence than anyone, anywhere, with the job of ensuring economic prosperity.
The FED Chair leads the American monetary policy process and pushes the money-creating button for the world's largest economy! That unmatched economic and financial power gives the FED Chair top rank among civil servants and sets the monetary and economic tone that investors track and major economies follow.
When used well, FED power supports prosperity and employment that drives economic growth. When needed, FED powers can stimulate more economic activity to heat a cooling economy or cool an overheated finance and business climate that produces excessive inflation.
FED powers are direct and indirect
To meet their mandate, the FED can apply powerful monetary policy tools detailed below. In addition, the indirect FED influence on financial, economic, and budgetary matters adds to its power.
The power tools of monetary policy include:
- FED discount rate
- Reserve needs
- Open market operations
- Interest on reserves
Together, these four power tools make the FED Chair the most powerful civil servant in the country. The FED uses those tools to create the most jobs while keeping prices stable and interest rates reasonable, which affects the interest rates of many funds, banks, and mortgages.
The discount rate
This is the interest rate the FED charges reserve banks for short-term loans, the FED funds rate. It is the rate set by meetings of the Board of Governors. That rate affects the short-term bank rate and backs up commercial bank liquidity. Lower rates encourage lending and are expansionary. Higher rates contract lending and economic activity.
Reserve requirements
The reserve is the amount of cash deposits banks must hold. Lowering it expands the economy because the banks can lend more. Raising it contracts the economy because banks must hold more cash and lend less. Reserve requirements almost always stay the same.
Open market operations
This buying and selling of U.S. Government securities is an activity directed by the Federal Open Market Committee. This tool gives the FED a strong influence on longer-term rates.
Remember, these are debt securities, so the price and value behave differently from equities. For equities, price is the measure of value, with higher prices having more value. For debt or bonds, yield is the measure of value, with higher yields having more value.
Buying debt raises the bond price, which has the effect of lowering the yield. FED buying U.S. Treasury Notes increases the price, which reduces the yield. Selling does the reverse, decreasing the price to raise the yield. This tool gets used together with setting interest rates. Buying debt securities supports reduced rates, and selling supports an increased rate.
This market activity has the effect of expanding or contracting the FED balance sheet. Buying Treasury Notes grows the FED balance sheet, and selling contracts it. That authority adds unlimited depth to the power of the FED!
The FED used and expanded that power to buy other financial products (mortgage bonds) to save the American and world economies in the 2008 financial crisis. Called Quantitative Easing (QE), the FED bought billions of mortgage-backed securities each month. That kept the mortgage market functioning when all private lenders had stopped.
Interest on reserves
This newest tool, created following the 2008 financial crisis, became the most used. It pays banks interest on required reserve amounts, encouraging banks to loan at rates higher than this guaranteed return. Previously banks sitting on excess reserves without lending contracted the market. As a result, an increased FED rate puts upward pressure on short-term interest rates, or a FED rate decrease does the opposite.
Indirect influencing power
The FED and Chair also have indirect influencing powers that were not intended or created by the legislation that established the FED. As lawmakers avoid tough, responsible financial and economic decisions, the FED influence grows, but the vacuum remains.
For example, by their very nature, politicians of all stripes are challenged to control spending. Political popularity depends on prosperity, giving, and spending rather than taxing or taking from citizens. That affects spending and budget control decisions and undermines financially responsible governance.
However, politicians unwilling to control spending and budgets have the effect of giving more power to the FED. Although the FED answers to congress, they are largely unaccountable and above political pressure. That removes them from any real public pressure as they operate outside the checks and balances system of the American government.
That means the FED does what they think is right, even when that may not be popular, politically expedient, or get political support. In contrast, only a few politicians expecting reelection could stand up to voters and make financially responsible but very unpopular moves or policies.
President Donald Trump appointed U.S. Federal Reserve Bank Chair, Jerome Powell
President Donald Trump appointed Jerome Powell to meet the challenge of leading the FED to a new era. As the effects of the financial crisis fade, markets seek to return to normal. The transition to regular interest rates presents a massive challenge for the FED in the years ahead. The QE program built a gigantic balance sheet over more than a decade of record-low interest rates. Unwinding it will take several years!
From crisis to opportunity
During the crisis, the world's most powerful civil servant was the brilliant Ben Bernanke. He made bold and imaginative moves to save the economy. With others, he took quick action. Those moves kept the world from plunging into financial darkness. With recovery, the world economy seems ready to move on.
That puts us at the end of the ultra-low, almost free-money interest rate era. We again witness more economic history getting made! As we climb from the interest rate bottom, Powell and the FED must get this part right!
With another excellent Chair in place, the FED will get it right. As a member of the Federal Reserve Board, Powell knows how it works. Powell was first nominated to the FED Board by President Barack Obama and took over from the steady hand of retiring Janet Yellen, who followed Bernanke.
Background on FED Chair Powell
Powell has a long history of leadership, brilliance, and going from success to success. He attended Princeton University and Georgetown Law Center. His experience grew by assisting state lawmakers, leaving him well-positioned to learn from leading legal minds. Financial and political power players know him, and he has well-developed contacts within the Republican establishment.
His law career included clerking for an appeals court judge on the Second Circuit. He gained experience at leading New York law firms. Time in investment banking roles grew his knowledge and success. He built wealth in a career in merchant banking and mergers and acquisition work. Working at several Wall Street firms, he rose to vice president.
Moving beyond quantitative easing
In higher profile public roles, he became known for his oversight of the "too big to fail" banks as a monetary dove and middle-of-the-road policymaker. He has expressed skepticism of quantitative easing, which has characterized a decade of FED policy. It will be up to him to move the FED from that bit of creative economic and financial wizardry.
While favoring Wall Street reform and consumer protection, Powell remains economically conservative. He advocates the need for more efficient regulation and seeks reforms that support housing finance with private capital.
Expect policy changes to decrease the housing industry's dependence on government programs. Such a FED change could get very interesting!
Janet Yellen - First Female FED Chair Retires
Chair 2014-18, Janet Yellen.
Immediately before Powell, Janet Yellen was the first woman Chair and provided a steady, quiet, and reliable hand. Her reassuring leadership style moved the economy beyond the financial crisis of 2008.
The lesson, FED Chair expectation direction, covers the time she took over from Ben Bernanke.
Remembering the 2008 crisis
Ben Bernanke, FED Chair, 2006-2014
In economics, yesterday and the past do matter, as was shown during 2008 when the entire world teetered on the brink of financial disaster. The brilliant and imaginative Ben Bernanke created credit and economic magic! He saved the world from credit collapse and the horror of depression. His bold action demonstrated the FED Chair's power. It justifies calling the position the world's most powerful civil servant. To read more, click here.
Question Answered!
Answering the question of why is the FED Chair so powerful helped us learn the unique economic and financial role of the FED and Chair in the U.S. FED activity and words of the Chair influence economic, financial, and central bank policy and action around the world.
Lesson takeaways:
The most powerful civil servant!
The world's most powerful civil servant has more economic influence than anyone, anywhere. FED Chair Jerome Powell now leads the process that sets the American monetary policy and pushes the button that creates money! Setting the FED policy sets the economic tone for all major economies. That unmatched economic and financial power is what gives the FED Chair top rank among civil servants and makes the FED and Chair important to investors.
- The FED Chair is the most influential civil servant.
- Monetary policy gets set using four tools, the FED discount rate, reserve requirements, open market operations, and interest on reserves.
- Donald Trump appointed Jerome Powell to succeed Janet Yellen, 1st female FED Chair.
- Unwinding the QE program, restoring regular interest rates, and shrinking the FED balance sheet are the significant tasks ahead.
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Investors, The FED And Central Banks, lesson links:
Central bank creation and role explained Lesson 1
FED billions bounced depression Lesson 2
FED begins Quantitative Tightening Lesson 3
FED market direction signals Lesson 4
Most powerful civil servant Lesson 5
Trillions stimulated Japanese economy Lesson 6
Central Banks of Canada, UK and Europe Lesson 7
Central bank lid and base setting Lesson 8
Next lesson:Trillions stimulated Japanese economy
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