Federal Reserve Member Selection and Appointments – News or Noise?!
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Is This Headline News or Noise?
Hello, I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. The investment team at Oak Harvest Financial Group is pleased to introduce a new mid-week release in which we will examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?”
As you know, our constant advice for investors is to “tune out the noise.” But sometimes it is hard to know what’s noise and what’s not! That’s what this series is going to be about.
Our goal here is to approach these stories and each topic from an independent, investor-first, standpoint, divorce ourselves from personal feelings, emotional bias, or political opinion, and briefly analyze what we believe each story means for investors.
These are going to be quick, casual, opinion pieces, and while we will use data to derive our conclusions, we will be wrong in our interpretations, at least some of the time. However, we are looking to practice what we preach, and help investors to rationally and critically analyze emotion laden stories.
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So with that said…
News or Noise?
First viewers, a brief and boring lesson in how the Federal Reserve Board is selected. The seven members of the Fed Board are nominated by the President and confirmed by the Senate. Sounds easy enough. It should be, but most of the times it isn’t. A full term is fourteen years. That’s an odd length but it insures there are fresh faces on the Fed as one term begins every two years, on February 1 of even-numbered years. The Chairman and the Vice Chairman of the Board are named by the President from among the members and are confirmed by the Senate. The chair heads then serve terms of four years.
A quick refresher for viewers. What are the key duties of the Fed? They are 1- conducting national monetary policy. That’s setting short term interest rates and other measures. 2- supervising and regulating banks. Making sure they are well capitalized, so a 2008/9 banking crisis doesn’t happen again. 3- maintaining financial stability, and 4 -providing banking services. The Federal Open Market Committee (FOMC) is the Fed’s monetary policy-making body and manages the country’s money supply. Basically, they control how much money is floating around in the economy at any time. These are some of the most important job responsibilities in our country from an economic point of view.
The central bank of the United States, our Federal Reserve, operates for the most part independently of the federal government. Theoretically, its actions are independent of politics and of both parties. The primary justification for an independent Federal and Central Bank is the need to insulate it from short-term political pressures. For example, without a degree of independence, the Fed could be influenced by election-focused politicians into enacting an excessively expansionary monetary policy to lower unemployment in the short-term. This could lead to high inflation and fail to control unemployment over the long-term.
With Randal Quarles recently announcing his year end resignation and Chairman Jerome Powell’s term as Chairmen up in the 1st quarter of 2022, President Biden is now in position to nominate not only a new Chairmen to the Fed, but 3 additional members and remake the Fed.
While Chairmen Powell and the current Fed piloted our countries monetary system through the Covid crisis, many Democrats, such as Sen. Elizabeth Warren, have stated their own beliefs that our financial system would be safer if the makeup of the Federal Reserve board were change to one favoring more regulation and stricter bank rules and oversight.
Regardless of President Bidens’ nominees, two things are certain: 1- financial markets love continuity and stability in leadership and policies, so they would like Chairman Powell to remain at the Fed’s helm, and 2- this topic will be a on again, off again, market moving news story throughout most of 2022 as the selection, review, and confirmation process of new Fed members happens. Unfortunately, for all of 2022, this will be newsworthy of market concern and not short term noise.
News or Noise: News! (Boring but important!)
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