Dollar Scholar Asks: How Powerful Is Fed Chair Jerome Powell, Really?

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Because I’m a journalist, a curious person and a stereotypical millennial who’s over-invested in other people’s business, I’m always reading financial news. I like to keep an eye on what Congress is up to, what Treasury Secretary Janet Yellen is doing and whether there are any weird khaki-related trends happening on Wall Street.

However, one area I’m not clear on is the Federal Reserve. I keep up with the central bank and the Fed chairman, Jerome Powell, but whenever they’re in the news I find myself wondering what’s happening behind the scenes.

What is the Federal Reserve, and what does Jerome Powell do?

William English, professor in the practice of finance at Yale University, agreed to help me figure it out. English told me to understand the distinction between the Federal Reserve and Powell himself.

According to the Federal Reserve system’s website, it has five functions “to promote the effective operation of the U.S. economy and, more generally, the public interest.” These include conducting monetary policy, stabilizing the financial system, ensuring consumer protection and more. The system is made up of three major entities: the Board of Governors, the Reserve banks and the Federal Open Market Committee (FOMC).

There are 12 Reserve banks scattered across the country. The Board of Governors has seven members, all of whom also serve on the FOMC (along with the president of the New York Fed and a few other officials). English, a former director of the Board of Governors and current senior special advisor to it, says the FOMC makes monetary policy decisions.

“Jay Powell, as chair of that committee and the Board of Governors, has a lot of influence over those decisions,” English adds. “But the committee could constrain him and not let him do what he wants to do.”

Then-President Barack Obama nominated Powell in 2012 to the board. Donald Trump tapped him to be Fed chair in 2017, and he was confirmed by the Senate in 2018.

Fed chairs serve four-year terms, which means Powell’s time is almost up. His term ends in February. Now-President Joe Biden has to figure out whether he wants to re-appoint Powell or call upon someone else.

As with everything in politics, there’s already drama around this. The White House told the Wall Street Journal recently that Biden “will engage with his senior economic team in a careful and thoughtful process to appoint a Federal Reserve chair in a timely manner” but declined to get more specific.

While some leaders like the idea of extending Powell’s tenure from a continuity standpoint, others — like Sen. Elizabeth Warren, D-Mass., and Sen. Sherrod Brown, D-Ohio — aren’t fans. (They’ve argued he’s too easy on big banks.)

It’s important to note that, at least in theory, the Fed’s monetary policy decisions are separate from partisan politics. To that point, English told me that I should have a vested interest in whether the Fed is achieving its goals of achieving low/stable inflation and low unemployment.

“If it succeeds, that’s a good thing for everybody: It’s easier to get a job because unemployment is low, your money goes further because inflation is low and stable, so the welfare of the country is higher,” English adds. “That’s a reason to pay attention to both what is the Fed saying, but also [to monitor] how’s it going?”

For example, Powell has come under fire for his handling of inflation, which the Fed wants to see average 2% in the long run. In July, Powell acknowledged that the rate is higher than they’d like, describing it as a “shock going through the system associated with reopening of the economy.” Welp.

Though the Fed is relatively autonomous, English says, it can’t fully go rogue. It’s legally required to send Congress written reports twice a year about what it’s up to. And when the FOMC gets together for its eight scheduled meetings a year, it issues statements and minutes.

“On the whole, the Fed has a lot of independence, and to make that palatable in a democracy, the Fed tries to be pretty transparent about what it’s doing and why it’s doing it — and be accountable for those decisions,” he adds.

As chair, Powell is the face of those efforts. As English says, “eight times a year, Jay Powell gets on TV and does a press conference.” So while he’s not acting alone, he is the public’s — and my — primary point of contact with the Fed.

“If you want to follow the Fed a bit more closely, you’ll probably end up listening to Jay Powell,” English adds. “But you have to remember he’s managing a committee that’s pretty big and has a variety of views, he doesn’t necessarily get what he wants.”

The bottom line

I probably should care about Jerome Powell because the system he oversees sets policies that can affect me and my wallet. Also, now is a good time to pay attention to him, because Biden has to appoint a Fed chair pretty soon and there’s going to be some debate about it.

Overall, though, I don’t need to worry much due to the way the Fed is set up.

“The Federal Reserve is a very powerful institution. Jay Powell is very influential, but by no means does he make the decisions,” English says.

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