Years ago, one of my favorite TV commercials involved an individual telling a friend about some advice he had received from his broker. As he begins to speak, everyone in the room stops what they are doing and leans forward to hear the pearls of wisdom.
Of course, life isn’t like that, but it might be nice if it were, especially when trying to give advice to teenagers or maybe even aging parents.
Perhaps the closest thing we have experienced to an actual situation when everybody stops to hear what a person has to say is when Alan Greenspan, Chairman of the Federal Reserve, delivers his periodic announcements regarding his expectations for the US economy and the movement of interest rates—something he’s been doing for 18 years.
It seems like the media hangs on his every word, even parsing some of them so the average Joe could understand better in order to make plans accordingly. It’s not that Greenspan isn’t a good speaker, but that he occasionally uses words or phrases not often heard in most households. As a result, pundits sometimes have taken it upon themselves to explain his pronouncements in plain English—with mixed success.
President Bush’s pick to replace Greenspan should have little difficulty in getting his views across to the American public. In announcing Ben Bernanke as the man to build on Greenspan’s record, the president noted that Bernanke was “widely admired for his keen insight and clear, simple language.”
With some 20 years in college classrooms prior to his accepting several key government economic responsibilities, Bernanke seems to know how to take highly complex and technical material and make it understandable for most people—from college freshmen to graduate students. As a former university economics professor, I can well relate to this kind of challenge. With his prior service on the Board of Governors and academic background, he is likely to command the respect of the financial community despite the daunting task of replacing a genuine legend. The first reactions to the appointment in the markets were positive, a critical factor in maintaining financial market stability.
Just explaining to some people what the Federal Reserve is and does can be difficult because to many people it appears to be a complex and complicated system. In reality, however, the Federal Reserve System is rather simple and straightforward.
The Federal Reserve Act was established by Congress and signed by Woodrow Wilson on December 23, 1913. Initially designed to provide the nation with a safe, flexible, and stable monetary and financial system, through the years, its role in banking and the economy has evolved and expanded.
The Fed is composed of a central Board of Governors appointed by the president and confirmed by Congress. Members are elected to 14-year terms and hold office in Washington, DC. Twelve regional Federal Reserve Banks are located in major cities around the country. The Dallas Fed district includes all of Texas and parts of Louisiana and New Mexico.
The Federal Open Market Committee (FOMC) is comprised of the seven members of the Board of Governors and five representatives chosen from the various Federal Reserve Banks. The Chairman of the Board of Governors also serves as Chairman of the FOMC.
To discharge its responsibilities for supervising and regulating banks, the Fed implements monetary policy mainly through determining the federal funds rate or the rate banks charge each other for overnight loans. The Fed affects this rate by using open market operations such as the purchase and sale of Treasury securities. In addition, the Fed can also set the discount rate, or the interest rate banks pay the Fed to borrow from it.
Buying bonds, which injects money into the economy, tends to lower interest rates. Likewise, selling bonds raises interest charges. Lower interest rates help stimulate the economy by making it easier to borrow money. Higher rates have the opposite effect.
There’s a lot more to the Federal Reserve System and its vast operations, but basically, that’s the simplified version of its primary responsibilities.
So, just what will Bernanke do if he is confirmed as the new head of the Fed? He does have definite views relating to inflation targeting, and many people expect him to follow that path in his decision-making processes. There is little concern that he will become a political figure or spokesman for the administration or misuse his bully pulpit to promote personal goals.
Rather, the general consensus is that Bernanke will use his powerful position to prudently steer the economy, wisely calm markets, and effectively oversee our nation’s banking system.
When Bernanke speaks, not everyone will stop what they are doing to listen to his every word, but they undoubtedly will pay attention to his decisions to determine the impact on their daily lives.