President Joe Biden recently appointed Jerome Powell to another four-year term as chairman of the Federal Reserve Board (FRB). He also chose Lael Brainard, who currently serves with Powell on the seven-member Board, to become the next vice chair of that body. While subject to confirmation by the US Senate, they are expected to muster bi-partisan support and to be confirmed. Interestingly, Brainard was the favorite of the left because of some of her positions on the government role in interest rates and climate change. But the left’s support may not be enough since she may face considerable opposition from Republicans.
It took the President several weeks before taking the safest course in renominating Powell, who was first appointed by President Trump in 2018. Under considerable pressure for a potpourri of economic calamities such as shortages and rising inflation, the President chose the safe course and hoped to avoid a long-drawn-out battle in the US Senate. Why was this nomination so crucial at this time and why is so much put on the shoulders of the Federal Reserve?
With inflation soaring, the Federal Reserve has taken on added importance. The Biden administration, already facing considerable pushback on the economy, particularly inflation, seemed to opt for a safe selection by selecting Powell. “I’m confident that Chair Powell and Dr. Brainard’s focus on keeping inflation low, prices stable and delivering full employment will make our economy stronger than ever before,” Biden said in a statement regarding the nominations. The President seems to be putting a great deal of weight on the shoulders of the leaders of the Fed.
The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation’s central bank. Every Western nation and many other countries have a central bank, with varying degrees of control by the national government. The Federal Reserve Board is based in Washington, D.C., and is an agency of the federal government. It reports to and is directly accountable to Congress.
Mr. Powell is no stranger to the government. He served as an Assistant Secretary and Under Secretary of the U.S. Department of the Treasury under President George H.W. Bush, with responsibility for policy on financial institutions, the Treasury debt market, and related areas. Prior to joining the Bush administration, Mr. Powell worked as a lawyer and investment banker in New York City. Powell’s positions in Republican administrations is what the President hopes will lead to a quick confirmation hearing in the Senate and perhaps some solid monetary policies that will turn the nation’s economy around.
Why is the Fed, as it is often called, important to the average person and businessman? One of the major areas of concern to all of us is interest rates. Banks borrow money from the Fed, which decides what interest rate the banks will pay on their loans. In turn, the banks pass on the rates they pay to consumers when they borrow, including credit cards, auto-loans, and home mortgages. Every move by the Fed on interest rates, whether up or down, has an immediate effect on the stock market. It has a snowball effect on every aspect of the economy, including pricing.
For a small business, the borrowing rates can make all the difference in their bottom line. When the economy does well, the Fed most likely lowers interest rates to encourage business expansion and increase consumer spending. It usually works in every respect. For example, lower interest rates on mortgages can give an instant boost to housing starts and housing sales in general. If the economy grows too fast, triggering record inflation, as is happening now, the Fed increases rates so growth can be slowed and stabilized. The Fed monetary policy can directly affect prices of everything we buy. These past two years, despite being Covid years, were a good example. The increase of the supply of money and the stimulus payments encouraged consumers to spend but supply chain disruptions and labor shortages led to price increases thus setting off soaring inflation.
The holiday season is a good measure of consumer spending. According to the New York Times, “the Black Friday weekend was a success for retailers but reflected challenges in the supply chain and the prevalence of early deals in October, which prompted customers to spread out their spending.” The Times continued: “Shoppers were clearly more comfortable going into stores than they were last year, but in-store visits were still well off pre pandemic levels. Foot traffic soared about 48 percent from last year, though remained down about 28 percent from 2019, according to data from Sensormatic Solutions.” What it clearly points out is that people have the money but various new factors like supply chain disruptions are impacting sales.
The importance of the Powell appointment by President Biden and the expected confirmation by the Senate most probably is lost on the average American. Most Americans do not realize just how much leverage the Fed has over the economy. But according to the Fed website, the Fed has a considerable role in shaping the economy. The site lists three specific goals: maximum sustainable employment, stable prices, and moderate long-term interest rates, all of which are extremely important to every one of us. The Fed accomplishes its goals with four basic duties: conducts monetary policy, supervises banks, maintains stability of the financial system and provides financial services to the banking system.
There are other ways that the Fed affects our daily lives such as clearing checks that we cash to process electronic transfers or payments we make through our online bill pay accounts or when we transfer money from one account to another. But it also influences our lives in less obvious ways. Most importantly, it is the interest rate that affects us all from what we pay for a credit card to a mortgage on a house.
The Fed most importantly keeps our banks strong and honest. It requires banks to have cash reserves. It also monitors banks to ensure that savings deposits are safe and that banks do not overstretch themselves so that they will not run out of cash.
I recently spoke to a small businessman who started a business in 2004 with a small gift from his family and a low interest loan from a local bank. “It was the interest rate that allowed me to renovate a dilapidated store and eventually led to a very successful business.”
The extensive coverage on the reappointment of Jerome Powell as chairman of the Fed was not only an important political story in the nation’s capital. It was important to every one of us since what the Fed does really make a difference in our daily lives.