The Federal Reserve will obviously be in focus this week and we talk about the Fed and its members a lot and I suspect that not everyone quite knows how the Fed works. Today is a quick primer.
The Federal Reserve System was created by the Federal Reserve Act in 1913 to serve as a formal lender of last resort to banks during panics and times of a liquidity crisis. The legislation provided for a system that includes a number of regional banks and a seven-member governing board.
The seven members of the Board of Governors are appointed by the President, who are then approved by the Senate and serve a 14-year term. A new term begins every two years and members who serve the full 14 years may not be reappointed.
The Chair and Vice Chair, currently Janet Yellen and Stanley Fischer, are named by the President from among the members and are confirmed by the Senate. Both the Chair and Vice Chair serve four year terms.
Right now, two of the seven seats are not occupied and Daniel Tarullo has announced that he will retire in April, leaving President Trump the ability to reshape the Fed, which could alter their approach to both monetary policy and financial regulation.
There are 12 regionally divided Federal Reserve Banks that operate under the general supervision of the Board of Governors. Each Federal Reserve Bank is responsible for the member banks located in their district.
The Federal Open Market Committee, or FOMC, is made up of all seven of the Board of Governors and five of the Reserve Bank Presidents, who rotate each year. Actually, the New York Fed President does not rotate given the importance of New York City to the financial system.
The FOMC members make the key decisions about monetary policy, interest rates, quantitative easing, inflation targeting, foreign exchange intervention and who wins the World Series and Super Bowl (just kidding about those last two, but they are powerful!).
The FOMC must meet at least four times per year, but generally meets eight times. We’ve only had one meeting so far, in February, and seven more are scheduled, including this week when we expect a hike in the Fed Funds rate.
Now that you’ve got the tools to be a Fed Watcher, you’ll be sure to more thoroughly enjoy the outcome of the FOMC meeting this week.