Have you ever heard of Federal Reserve Board Governor Jerome Powell? Stanford University economist John Taylor? Former Federal Reserve Board Governor Kevin Warsh?
Powell, Taylor, Warsh are mostly unknown to the general public as well as most small business owners and entrepreneurs, but one of them could have significantly impact your business because they are among the finalists to be the next chair of the Federal Reserve Board’s Board of Governors. President Donald Trump is expected to make his decision in the next week. The U.S. Senate would then vote on his choice. Current chair Janet Yellen could be renominated for another 4-year term, but Powell is favored, major business newspapers report.
How important is the Fed chair? If you own or want to start a small business, you might need a loan. The interest rate you pay your lender is determined in large part by the Fed chair. This power can also affect the U.S. economy. Easy credit can boost economic activity and, thus, increase your company’s sales. Tight money can have the opposite effect.
“I’d put the Fed chair at the second most powerful person in the United States,” Washington Post writer Neil Irwin said. “The president comes first…The chief justice of the Supreme Court is both powerful and independent, but is much more likely to be outvoted by peers than is the Fed chair.”
On paper, the Fed chair isn’t close to being the second most powerful person in the U.S. In fact, the chair is one of 12 people who vote on Fed policy. The chair is one of seven people on the Board of Governors and five of the presidents of the 12 Federal Reserve banks also have a vote. The president of the New York bank always votes, the presidents of the Chicago and Cleveland banks vote every other year, and the other nine presidents vote one out of every three years.
Irwin points out that the Fed chair doesn’t supervise the other governors and the formal structure of the Board of Governors makes the chair “first among equals.” Historically, though, the Fed chair has been more than an equal member in setting policy.
“The chairman exercises a lot of informal pressure over the rest of the board to get in line,” reports the Slate magazine article “20 Simple Questions About The Federal Reserve.”
Paul Volcker Tamed Inflation
Dissent among Federal Reserve Board policymakers, also known as the Federal Open Market Committee (FOMC), pales in comparison to dissent on the Supreme Court. Consequently, judges like Antonin Scalia who never became a chief justice are far more likely to become influential than Fed governors who never chaired the Board and Fed chairs are more likely than chief justices to profoundly impact the U.S.
The Fed chair influences colleagues’ votes through the following actions:
* Setting the agenda for the eight times per year FOMC meetings, which decide the crucial federal funds interest rate.
* Directing staffers on what information to present to the 12 policymakers. In other words, decisions on interest rates can be based on staffers’ forecasts.
* Deciding who can make presentations at meetings and their length.
Wealth Authority’s Top Pick: Paul Volcker
The rankings of Fed chairs that Wealth Authority found have a consensus — Paul Volcker, the Fed chair from 1979 to 1987, was the most significant. Volcker, 90, is credited with ending the hyperinflation that marred Jimmy Carter’s administration and launching a low-inflation economic boom that started during Ronald Reagan’s administration. Alan Greenspan and Ben Bernanke also get high marks.
“Paul Volcker is the greatest chairman in the history of the Federal Reserve Board,” Larry Kudlow, an economist for the Federal Reserve Bank of New York before becoming an economics analyst on television, told CNBC. “He faced 15 to 20 percent inflation…which was destroying our economy and the rest of the world’s economy. I believe that was the greatest crisis of all. He conquered it.”
The article on Fed chair rankings includes a chart titled “How Do The Fed Chairs Stack Up?” that concludes Volcker’s performance was superior to Greenspan, Bernanke, Arthur Burns, and William Miller. Note how much higher the green line representing Volcker is on the right side of the chart than the other lines. Volcker is rated the best because the inflation rate was 13.5 percent during the last three months of predecessor Miller’s term and 2.2 percent during Volcker’s last three months.
The Fed has bios of all of chairs that details their accomplishments. Greenspan, 91, the chair from 1987 to 2006, is credited with “facilitating the longest official economic expansion in US history.” Bernanke, 63, the chair from 2006 to 2014, is credited with helping the U.S. recover from The Great Recession of 2008-’09.
The bottom line is that Fed chairs have directly influenced the U.S. economy’s performance and indirectly influenced the performance of businesses throughout the nation.
As a small business owner or entrepreneur, you should keep your eye out on what the next Fed chair does in regards to the federal funds rate. Investopedia defines it as “the interest rate at which member depository institutions lend each other money held at the Fed overnight.”
More importantly, it impacts interest rates on loans for financing a company’s launch or expansion. A chart on this page shows the federal funds rate was between 0 and 0.25 percent between Dec. 16, 2008 and Dec. 16, 2015, but has been raised four times in the last two years.
“A higher federal funds rate makes it more expensive to borrow money,” says Investopedia.
Regards,
Ethan Warrick
Editor
Wealth Authority