What does a Fed chairman do?
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Tuesday, October 25, 2005; 12:13 PM
WASHINGTON -- Everyone says the Federal Reserve is important, but just what it does isn't all that clear to most people. Some questions and answers about the job of the chairman:
Q: What is the Federal Reserve?
A: It is the nation's central bank, composed of a seven-member Federal Reserve board in Washington plus 12 regional Federal Reserve Banks.
Q: What does a central bank do?
A: Its primary responsibility is to control the availability of money and the cost of money -- interest rates. When the economy is growing sluggishly, the Fed provides more money to the banking system. That pushes down interest rates and spurs greater borrowing and more economic growth. When the economy is growing too quickly and inflation is rising, it withdraws money from the banking system. That pushes interest rates higher and slows economic growth, helping to keep a lid on inflation.
Q: How does the chairman influence these decisions?
A: Technically, the chairman has only one vote on the Federal Open Market Committee. This panel, which sets interest rates, is composed of the seven Fed board members in Washington and the 12 presidents of the Fed regional banks. Only five of those regional bank presidents are voting members of the FOMC at any one time.
Q: So if the Fed chairman is only one vote out of 12, how does that give him any influence?
A: The Fed does not work like the Supreme Court, where 5-4 votes are common. The financial markets, which closely monitor Fed actions, would be unnerved with such a close vote on the FOMC. Federal Reserve Chairman Alan Greenspan was a master consensus builder during his 18-plus years on the Fed. He rarely had even a single dissenting vote.
Q: Will Ben Bernanke, the man nominated by President Bush to succeed Greenspan, be as successful in molding consensus on the Fed?
A: Bernanke has the advantage of having served on the Fed board before he was chosen by Bush to be chairman of the Council of Economic Advisors earlier this year. He was also a highly respected economist specializing in the operations of central banks during his tenure at Princeton. Bush tapped him for the Fed in 2002.
When Greenspan took over in August 1987 from another legendary Fed chairman, Paul Volcker, questions were raised about how long it would take Greenspan to put his stamp on the Fed. As it turned out, he did so in just two months' time with his skillful handling of the Black Monday stock market crash in October 1987.
