What Does a Fed Chairman Do?

The Chairman of the Board of Governors of the United States Federal Reserve might sound like a lofty title for some smart guy in an ivory tower.

Yet the person who occupies this key position in the nation’s central bank can have a tremendous influence over important aspects of daily life, such as the interest rate your bank savings account pays or how much your next pair of shoes may cost.

Here’s a look at the aspects of ordinary life that can be affected by the actions of the Fed and its chairman.

Interest rates — The Fed is charged with helping maintain the best possible conditions for economic growth. The Federal Open Market Committee, led by the Fed chairman, adjusts two key interest rates in pursuit of this goal. These two rates, which affect the rates banks pay to borrow from each other and from the Fed itself, influence rates paid by consumers on credit cards, auto loans, and mortgages.

Inflation — High inflation is both a symptom of economic growth and, if left unchecked, its death knell. Coincidentally, the Fed uses interest-rate policy to defend against inflation, which can occur when the economy is growing too fast. By raising rates, the Fed reduces the availability of credit, thereby helping to slow economic growth to a more reasonable rate, which can help keep prices from rising faster than most people’s incomes.

Credit conditions — Interest rates are only one aspect of credit conditions. The Fed also enacts or advocates policies to help protect both borrowers and lenders from extreme risks.

The national mood — The chairman routinely communicates with the public in speeches to Congress and in statements about interest rates. What he says and how he says it can influence the mood of the financial markets, which are looking for optimism and a confident outlook.

The Federal Reserve plays an important role in our economy, and the chairman is its most visible player. His behavior is a good source of clues about what the future may hold.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.