PMC Weekly Review - September 8, 2017

A Macro View: Hidden news – Could a Quiet Storm be Brewing?

This week’s news headlines revolved around hurricanes Harvey and Irma, as well as President Trump’s move to end DACA. The expansive nature of these events may have buried the news that the Vice Chairman of the Federal Reserve (Fed) announced his resignation, which raises questions about the Fed’s structure and why it matters. So let’s explore the Fed’s establishment and structure and how it has evolved into what we have today, as well as the future ramifications of the Vice Chairman’s Stanley Fischer’s departure.

The Federal Reserve, colloquially called the Fed, is the central bank system of the United States (US). Created in 1913 by an act of Congress, and signed into law by President Woodrow Wilson, its mission was to provide central control of the monetary system to alleviate financial crises. The US Congress established three key objectives for the Fed at the time, which have expanded to five: maximize employment; stabilize prices; moderate long-term interest rates; supervise and regulate banks; and maintain stability of the financial system. As if the Fed’s objectives aren’t complex enough, the structure can also be confusing. So let’s simplify it.

The four main components of the Federal Reserve System are (1) the Board of Governors, (2) the twelve regional Federal Reserve Banks, (3) the Federal Open Market Committee (FOMC), and (4) the country’s member banks. The governing body, which we hear about the most, is the Federal Reserve Board (the Board), consisting of seven members (governors), who are appointed by the President and confirmed by the Senate. Each governor serves staggered 14-year terms. The Board is led by the Chair and the Vice Chair, whom the President appoints from among the sitting Governors. The Chair and Vice Chair both serve four-year terms, each can be renominated by the President until their 14-year Board terms expire.

The twelve regional Federal Reserve Banks serve twelve districts across the US, representing each economic region. Each bank has nine directors, who appoint a President who sits on the Federal Open Market Committee. The FOMC sets monetary policy, and consists of the Board and the twelve regional presidents, although only five bank presidents vote at any given time. The president of the New York bank is one of the five voting presidents, and the other four voting members rotate through on one-year terms. Finally, the member banks are private institutions in the US, primarily national banks.

Now that we have explained the Fed’s structure, let’s consider the current Board. The seven-member Board consists of Chair Janet Yellen (whose chair term ends in February 2018, and 14-year governor term ends in 2028), Vice Chair Stanley Fischer (who announced his mid-October departure this week), Lael Brainard (through 2026), and Jerome Powell (through 2028). Three vacancies exist. The Board exercises broad supervisory control over the financial services industry, administers certain consumer protection regulations, and oversees the nation’s payment system. Therefore, Vice Chair Fischer’s departure in October means President Trump could completely reshape the panel. The political saying “personnel is policy” couldn’t be more true when it comes to the Board—changing more than half the panel could mean sweeping changes across US financial markets, including financial deregulation, a top priority for President Trump.

President Trump has nominated private equity manager Randal Quarles to fill one of the vacancies, and just yesterday, the Senate Banking Committee voted to advance his nomination to the full Senate. Additionally, the President still must consider whether to renominate Chair Yellen to another four-year term. Although he has said he may renominate her, the administration is also considering other candidates. Should she not be renominated, Ms. Yellen would be only the third Fed leader since 1934 to serve a single term.

Although we have yet to discover the nominees for the remaining three Federal Reserve Board governors, it is clear that President Trump can change the shape of the Board, and consequently the shape of the US monetary system. This is hardly news to be swept under the headlines, even if there are larger storms, both figuratively and literally, tormenting the nation. 

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