Practitioner at the Helm of the Fed: What Are the Implications?
Author | Jessica Tokic,Damir Tokic |
Date | 01 October 2018 |
DOI | http://doi.org/10.1002/jcaf.22360 |
Published date | 01 October 2018 |
Practitioner at the Helm of the Fed:
What Are the Implications?
Damir Tokic and Jessica Tokic
INTRODUCTION
The Federal Reserve Act of
1913 established the
Federal Reserve System
(referredtoastheFed)asthe
U.S. Central Bank. The Federal
Reserve System has three key
entities: (a) the Board of Gover-
nors, (b) the 12 Independent
Regional Federal Reserve
Banks, and (c) the Federal Open
Market Committee (FOMC).
The Board of Governors
oversees of the Federal Reserve
System and has seven members
who are nominated by the presi-
dent of the United States and
confirmed by the U.S. Senate.
Each of the 12 Reserve Banks is
separately incorporated and has
a nine-member board of direc-
tors, with three directors
appointed by the Board of Gov-
ernors, and six directors elected
by the member banks. The
FOMC was created by the
Banking Act of 1933 with spe-
cific purpose to conduct mone-
tary policy. The FOMC has
12 voting members, which
include all seven members of the
Board of Governors, plus the
president of the Federal Reserve
Bank of New York, and four of
the remaining 11 Reserve Bank
presidents, who serve one-year
terms on a rotating basis.
Thus, based on the structure
of the Federal Reserve System,
the Fed’s decision-making power
is heavily concentrated within
the Fed’s Board of Governors
entity. More importantly, the
chair of the Board of Governors
is automatically the chair of the
FOMC, and simply referred to
as the Fed chair. Romer and
Romer (2004) suggest that the
Fed chair exerts heavy influence
on other members of the Board
of Governors and the FOMC.
Thus, given the mandate of the
Fed, the Fed chair is likely the
most powerful public administra-
tion official nominated by the
president of the United States
and confirmed by the
U.S. Senate.
With respect to the Fed’s
dual mandate, the 1977 amend-
ment to the Federal Reserve Act
(Resolution 133), also known as
the Full Employment and Bal-
ancedGrowthAct,clearlyspec-
ifies that the Fed must promote
price stability and full employ-
ment, or specifically to ensure
that the unemployment rate
should not exceed 4%, and infla-
tion should be 3% or less
(Steelman, 2011; Thorbecke,
2002). Further, based on the
1951 Fed-Treasury Accord, the
Fed can conduct the monetary
policy independently from the
U.S. government (Cukierman,
2008; Hetzel & Leach, 2001).
Thus, the Fed has been given
the “keys”to manage the eco-
nomic environment in the
United States (and indirectly
globally), and to “drive”inde-
pendently from any interferences.
More importantly, the Fed chair
has been put into “the driver’s
seat.”Consequently, the Fed
chair appointment and confirma-
tion is an extremely important
decision, given the position’s
influence at the FOMC, and the
importance of the monetary pol-
icy to the economy, and broadly
to the political and social stabil-
ity (Meltzer, 2010).
This article looks into the
appointment of the Jerome
Powell as the 16th chair of the
Federal Reserve since February
5, 2018 (appointed by the presi-
dent Trump). It is important to
look into the appointment of
© 2019 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22360
48
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