Changes Ahead at The Fed
David Coffey
Senior Portfolio Manager

With the US dollar weakening against most major currencies and announcements from the Federal Reserve becoming increasingly regular, we look into the scope and responsibility of what is commonly known as “the Fed”.

What is the Fed?

The Federal Reserve, or the Fed, is the central bank of the United States of America. Its website outlines its remit as providing the nation “with a safe, flexible and stable monetary and financial system”.

Why was it established?

Following a spate of financial panics in the late 1800’s and the great Panic of 1907, Congress established the National Monetary Commission in 1908 to investigate the causes of the 1907 panic and to propose legislation to regulate the banking system. The Federal Reserve Act established the Federal Reserve System in 1913.

What is its mandate?

Originally, it had three objectives: to maximise employment, to stabilise prices, and to moderate long term interest rates. The Fed’s often quoted “dual mandate” related to the first two of these objectives but its responsibilities have expanded since the financial crisis and now include regulating the banks and maintaining stability in the financial system.

What are the Twelve Districts?

The Fed is divided into twelve Federal Reserve Districts. Each of these districts has its own Federal Reserve Bank and in turn, its own president and board of directors. The twelve districts are: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas, Dallas and San Francisco.

What is the Board of Governors?

This is the main board that oversees the Federal Reserve System. It consists of seven members who are appointed by the President and confirmed by the Senate. A full term is fourteen years and one term is created every two years, on 1st February of even-numbered years.

Chairman and Vice Chairman

Both the Chairman and the Vice Chairman are also appointed by the President, from among the board members, and are confirmed by the Senate. The term of the Chairman and Vice Chairman is only four years but their 14-year term on the Board of Governors is not affected.

What is the FOMC?

The Federal Open Markets Committee (FOMC) is the monetary policy-setting body of the Fed. It meets eight times a year and consists of twelve members: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four rotating members from the other Federal Reserve Banks. A statement is issued after each meeting and four times a year, the Chairman holds a press conference.

How does the FOMC set policy?

The FOMC conducts policy by setting short term interest rates in response to changes in the economic environment. Since 2008, the FOMC has engaged in the purchase of Treasuries in order to lower longer term interest rates. Views differ on how much the FOMC can manipulate longer term interest rates but, despite the different views, there is no doubt that the Fed, and many other central banks, prevented the financial crises from descending into a deeper depression.

What next for the Fed?

Three of the seven positions on the Board of Governors are currently vacant and are awaiting appointment from President Trump. In addition, Janet Yellen’s term as Fed Chairwoman ends in February 2018 and Stanley Fischer’s term as Vice Chairman ends in June 2018. While both could stay on as board members until the terms expire in 2024 and 2020, it is expected that both will resign with the completion of their terms at the head of the Board. Assuming President Trump does not reappoint either of them, the Board of Governors will see five new appointments by the President within the next twelve months. This gives the President an opportunity to make appointments that could radically alter US monetary policy for years to come. Watch this space.

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