Fed Shows Worth as Trump Considers Next Chair
The Federal Reserve acts as the central bank for the United States, setting American monetary policy, promoting financial stable markets, supervising financial institutions, maintaining the safety and efficiency of American payment systems, and pursuing community advancement. The Fed is made up of 3 components– a Board of Governors, 12 Federal Reserve Banks, and a Federal Open Market Committee. The Board consists of 7 presidentially-appointed governors each with a term of 14 years. Appointments to the positions of chair and vice-chair only last for 4 years. The 12 Federal Reserve Banks provide services like check clearing, fund transfers, and automated clearinghouse operation for depository institutions across the United States. In 2015, the Fed transferred nearly $100 billion in net earnings to the U.S. Treasury.
The structure and function of the Board and 12 regional banks serves a vital purpose to the American financial system. By making Board appointments last longer than politically-elected positions like President and Senator, the Fed enjoys a degree of separation from political influence and is able to develop monetary policy that historically has curbed overinflation and maximized employment. One major control exercised by the Federal Reserve is its power to set key interest rates. While higher interest rates can improve payouts on savings accounts, it can also cause bumps on mortgage rates and credit cards, especially if the Fed keeps rates up for extended periods of time.
Although interest rates hovered over 5% in 2008, the mortgage crisis of that year brought rates crashing down as the government looked for ways to encourage spending and help businesses borrow cheap money. Since the recession almost a decade ago, the Fed has kept rates near 0%. Bolstered by low but steady growth in incomes and employment, rates have slowly been creeping up over the past 6 months. The person behind the decision to slowly bring interest rates back up, Fed Chair Janet Yellin.
Janet Yellen took over as Chair of the Board of Governors of the Federal Reserve in 2014. Her term is set to expire in January 2018, but she will remain on the Board until 2024. Prior to being appointed Chair, she served as Vice-Chair and also was President of the Federal Reserve Bank in San Francisco. Chairwoman Yellen possesses a PhD in Economics from Yale University and had her first stint with the Fed as an economist for the Board in 1977. She recently had breakfast with President Trump’s staff, and he is considering reappointing her to the position next year, although some fear that her positive stance on the importance of strict financial regualtion could put her at odds with the administration and out of the running.
Many in the finance industry are watching closely this week as the Fed discusses shedding some of its debt holdings. Yellen is likely to face questions about low inflation, shrinking unemployment, and the effects of Hurricanes Harvey and Irma on American markets. Regardless of the outcome of this week’s meeting, the Fed will likely continue to play an important role in guiding world markets.
As the Fed raises interest rates in the coming months, short term credit in the form of adjustable rate mortgages, credit cards, and even the national debt will see rising costs that could cause higher risk borrowers to be left out or pay significantly more for credit. With nearly 4 out of 5 Americans already living paycheck to paycheck, higher rates and the subsequent reduced access to tradition capital sources could create financial difficulties for American households. Small dollar lenders, like the tribal lending entities represented by NAFSA, will likely need to fill the gap with reliable credit opportunities for the burgeoning American economy.
