Introduction to the Federal Reserve
The Federal Reserve, also known as the "Fed," is the central bank of the United States. It plays a crucial role in the country’s economy by setting interest rates and regulating the money supply. The Fed is led by a chair, who is currently Jerome Powell. However, President Donald Trump’s continued pressure on Powell and his stated desire to appoint a replacement who will lower rates have raised concerns about potential clashes at the typically consensus-driven central bank.
How the Fed is Organized
The Fed is organized in a way that leaves open the possibility of a split chairmanship. The chair of the Fed’s Board of Governors is also the chair of the Federal Open Market Committee (FOMC). However, this is not a requirement, and the FOMC could potentially choose a different chair. The FOMC is responsible for setting the Federal funds rate, which is a key interest rate that affects the economy. The Board of Governors, on the other hand, sets the rate paid to banks on reserves they keep at the Fed and oversees the "discount window," which can provide liquidity to banks.
FOMC Chair vs. Board Chair
In theory, it is possible for the FOMC to choose a different chair than the Board of Governors. This could happen if the FOMC decides to hold a vote and chooses a different chair, or if the Board of Governors chooses a new chair who is not the same person as the FOMC chair. This could lead to a situation where there are two different chairs, each with different responsibilities and powers. The FOMC chair would be responsible for setting the Federal funds rate, while the Board of Governors would be responsible for setting the rate paid to banks on reserves and overseeing the discount window.
Potential for Conflict
This situation could lead to conflict between the two chairs, as they may have different views on monetary policy. The FOMC chair may want to raise or lower interest rates, while the Board of Governors may have different views. This could lead to confusion and uncertainty in the markets, as investors try to figure out which chair to follow. The potential for conflict is heightened by the fact that the FOMC and the Board of Governors have different responsibilities and powers.
Historical Context
The idea of a "shadow" Fed chair has also been raised, where a new chair is nominated before the current chair’s term expires. This could lead to a situation where there are two chairs, one of whom is not yet officially in office. This could lead to confusion and uncertainty in the markets, as investors try to figure out which chair to follow. The notion of a shadow chair has already raised alarms as a recipe for market chaos.
Expert Opinions
Market veteran Ed Yardeni, president of Yardeni Research, has warned that whoever the next Fed chair is, they must still work with the rest of the consensus-driven FOMC. If a loyalist takes over and is too much of an outlier on monetary policy compared with the rest of the FOMC, then the chair could even be outvoted. Robert Eisenbeis, who previously served as director of research at the Atlanta Fed, has also warned that the system will rise up against a chair who tries to impose their will on the FOMC.
Conclusion
In conclusion, the possibility of a split chairmanship at the Fed is a real concern. The FOMC and the Board of Governors have different responsibilities and powers, and a situation where there are two different chairs could lead to conflict and uncertainty in the markets. The notion of a shadow chair has also raised alarms as a recipe for market chaos. It is essential for the next Fed chair to work with the rest of the FOMC and respect the tradition of consensus and independence that has guided the Fed’s decision-making process. The Fed’s reputation for being independent from political pressure is crucial, and any attempts to undermine this independence could have serious consequences for the economy.
