The Federal Reserve Board can seem mysterious. With signs of the stimulus program unwinding and the recent nomination of Jerome Powell to replace Janet Yellen next year as chair of the board, there’s renewed interest in unpacking this opaque government entity. Our team of Certified Financial Planners want to share a little education with you this week, reviewing the details of The Federal Reserve Board, committees and what lies ahead with the proposed changes in leadership.
What’s the difference between the Federal Reserve Board and the Federal Open Market Committee?
The Federal Reserve Board (usually) consists of seven members who serve as the main governing body of the Federal Reserve System (commonly referred to as ‘the Fed’).
The Federal Open Market Committee (FOMC) focuses their attention on monetary policy. The committee that consists of the seven members of the board, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents who serve on a rotating basis, 1 year at a time. For a fun (seriously) overview of monetary policy and the influence of the Fed chair has, check out this video:
How are members chosen to serve on the Federal Reserve Board and how long is their term?
Members are nominated by the President and confirmed by the Senate. Board member terms are 14 years, during which they may be asked to serve as chair or vice chair. Those leadership positions have a 4 year term. Historically speaking, chairs are often asked to serve at least 2 terms (though some, like Alan Greenspan, served much longer). Janet Yellen will be the first since 1979 to be replaced after just one term.
Who is on the board now?
- Janet Yellen has been on the board since 2010. She is wrapping up her term as chair, which will end in February. It is assumed she will then continue to serve as board member through 2024.
- Jerome Powell, board member since 2012. He will swap places with Yellen in February, succeeding her as chair.
- Lael Brainard, board member since 2014.
- Randal Quarles, board member since October, 2017.
Wait, a board of seven only has four members?
Yep. Right now anyway. This means President Trump has quite an opportunity to shape America’s central bank with further nominations. The central bank has its share of critics. The vacancies on the board concentrate the power in the short term, and challenge its credibility and legitimacy. Experts are hoping that the vacancies are filled with a variety of experiences, perspectives and viewpoints. A couple of the names being tossed around for the remaining positions include Mohamed El-Erian (former Pimco CEO and current economic advisor at Allianz) and Michelle Bowman (Kansas banking regulator). It’s unlikely any of the three vacancies will be filled before the end of the year.
Why was Powell chosen to replace Yellen?
Serving on the board since 2012, Powell’s nomination is seen as a “safe gamble” by the president. The last week or so has seen an increase in the yield on the 10-year US Treasury note – often looked to as the benchmark for monitoring credit markets. Analysts attribute this in part as a reaction to Powell’s nomination. That said, he wasn’t necessarily a shoe-in. Unlike previous Fed chairs, Powell is not an economist. He has a background as a lawyer and banker, and is a registered Republican, which all excite some on the right. He’s attractive to some on the left as he is a carryover from the Obama administration and has frequently aligned himself with Yellen’s dovish policies.
What’s will be on Powell’s plate moving forward?
You’ll remember from our third quarter update that The Fed recently began the process of reducing the size of their balance sheet by letting some of their bonds mature and roll off. This, in addition to the gradual increase in interest rates (0.25% in December ‘16, and March / June of ‘17) mark the first signs of unwinding the stimulus program. At this point, experts are predicting another rate hike this December and two-four more next year. While there are many unknowns around Powell’s position, he has tended to align with Yellen on monetary policy, which may mean few surprises moving forward.
What does this mean to me?
The impact of the decisions made by this board will echo not only throughout the United States, but globally. While the change in interest rates as we see it has largely been priced into the market, the impact of the efforts to return a normal balance sheet have yet to be seen. For our client families, our team of financial advisors has been working within each asset class to reduce volatility in anticipation of continued tightening of monetary policy. We have moved out of some of the longer term fixed income positions and into some shorter term / floating rate positions to help adjust more quickly to interest rate changes. We’ve also taken this opportunity to tone down the exposure to high yield bonds in favor of higher grade, corporate debt.