What does the Fed chair do, anyway?

What did I do?
What did I do?
Image: AP/J. Scott Applewhite
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Donald Trump will reportedly appoint Jerome Powell, a current member of Federal Reserve Board of Governors, to become the central bank’s next chair, replacing Janet Yellen.

This is a big deal. The Fed chair is one of the world’s most powerful economic figures. The announcement will move markets, and be endlessly analyzed by economists.

But what does this person actually do? There are probably few more pivotal public jobs that so few people actually understand. A 2014 poll found that less than one quarter of Americans could name Yellen as the current head of the Fed.

On paper…

The Fed chair’s official title is the Chair of the Board of Governors of the Federal Reserve System. It’s a mouthful, but it is also enlightening.

The Federal Reserve System is the US’s central bank. It is a network of 12 regional banks dispersed across the country in places like New York and San Francisco. Put simply, the Fed is responsible for regulating the US banking system and directing monetary policy—namely, by setting the short-term interest rates that banks charge each other, a key factor in loosening or restricting the flow of credit to businesses, individuals, and other borrowers. It aims to set rates at a level that strikes the right balance between inflation and employment, keeping the economy on an even keel and not running too hot or cold.

To give it a go for yourself, the San Francisco Fed made an online game called “Chair the Fed.” It is not clear whether Trump made this part of the application process for the top job this time around.

The Board of Governors are seven people nominated by the president to oversee the Fed. They can serve a full 14-year term, plus whatever was left of an unexpired term if their predecessor did not complete their full term. The Fed chair is the leader of this group, and serves a four-year term (Yellen’s expires in February next year).

The Fed chair is the public face of the board of governors and testifies to US congress twice a year on the state of the economy and monetary policy. Besides presiding over meetings and setting the agenda, the chairperson does not officially have any more power than the other six governors. Fed decisions are made by consensus, and the chair’s opinion does not, by law, carry any additional weight.

In practice…

The Fed chair is the boss. Historically, heads of the Fed have varied from consensus-driven (Yellen and Ben Bernanke), to more domineering (Alan Greenspan), and almost always get their way.

Though other members of the Board of Governors and a rotating set of presidents of the regional banks are free to dissent with the Fed chair on rate-setting decisions (Neel Kashkari, the president of the Minneapolis Fed, nearly always does), deference is the norm. In the mid 1980s, when the majority of the Board of Governors disagreed with then Fed chair Paul Volcker’s policies, he was still able to get them to vote with him by threatening to resign. An interest-rate decision has not gone against the vote of a Fed chair since the 1930s (pdf).

The financial world hangs on a Fed chair’s every word, since they speak for the world’s most important central bank and set policy that affects the global reserve currency. Let’s hope that the next person to take the job is up to the task.