Federal Reserve Chairs and What They Do
Who Are the Leaders in the Battle Against Inflation?
The Chair of the Board of Governors of the Federal Reserve System set the direction and tone of the U.S. central bank. The Chair is the head of both the Fed Board and the Federal Open Market Committee.
The Fed chairs don't want to reduce inflation to zero. A little inflation is a good thing. It makes shoppers expect prices will continue rising. They buy things now before prices go up even more. The increased demand spurs economic growth. As a result, the Fed chairs set a target inflation rate of around 2%. That applies to the core inflation rate. It takes out the effect of volatile food and energy prices.
Each past Fed chair has had to deal with inflation. But the challenges they've faced and the tools they've used have been very different.
Timeline of Past Chairs Since 1934
- Mariner S. Eccles (1934-1948) had to fight staggering inflation. It reached a peak of 18.1% in 1946. Federal government programs to provide jobs for returning veterans caused it. The Fed Board expected deflation after World War II. That's what occurred after the Civil War and World War I. When inflation hit instead, the chair of the Federal Reserve Bank of Philadelphia wanted to raise interest rates to counter it. Eccles, who had worked with President Roosevelt to combat the Great Depression, chastised him. The Treasury Department pressured the Fed to keep interest rates low. It wanted to pay off the government's World War II debt at low cost.
- Thomas McCabe (1949 - 1951) created the independent position of today's Federal Reserve. He negotiated the Treasury-Federal Reserve Accord with the Truman Administration. That ended the Fed's obligation to monetize the U.S. debt. Low-interest rates allow the federal government to spend more. That increases the money supply.
- William McChesney Martin, Jr. (1951-1970) aggressively fought inflation with contractionary monetary policy. He was the first truly independent Fed chair. He inherited 6% inflation but successfully fought it until 1968. He raised the discount rate in 1965, despite President Lyndon Johnson's objections. But LBJ's spending on the Great Society and the Vietnam War created 4.7% inflation in 1968. Americans bought more imports, which sent dollars overseas. Foreign banks exchanged the dollars for gold per the 1944 Bretton Woods agreement. That threatened to deplete U.S. gold reserves at Fort Knox. The Fed raised rates to strengthen the dollar's value. But that created a recession.
- Arthur Burns (1970 - 1979) became Fed Chair during the Great Inflation, the period of 1965 to 1982. In short, easy monetary policy during this period helped spur a surge in inflation and inflation expectations. In retrospect, when inflation began to rise, policymakers responded too slowly. The delayed response led to a recession. He tried vainly to counteract President Nixon's economic policies. In 1972, Nixon imposed wage-price controls to stop inflation. Instead, it worsened the recession. Businesses couldn't raise prices, so they laid off workers. Employees couldn't get raises, so they cut back on spending. Burns lowered interest rates to fight the recession, but that worsened inflation. When he raised rates, it slowed economic growth. By the end of his term, the United States suffered from stagflation.
- Paul Volcker (1979-1987) fought 10% annual inflation rates by raising the Fed funds to 20% and keeping it there until inflation was in check. Unfortunately, it created the recession of 1981. Volcker took this dramatic and consistent action to get everyone to believe that inflation could actually be tamed.
- Alan Greenspan (1987-2006) advocated laissez-faire economics. That's where the Fed doesn't try to micromanage the economy. It adheres to broad goals of stimulating the economy while avoiding inflation. He relied primarily on the fed funds rate to achieve his goals.
To fight the 2001 recession, Greenspan lowered the fed funds rate to 1.25%. That also lowered interest rates on adjustable–rate mortgages. The payments were cheaper because their interest rates were based on short-term Treasury bill yields, which are based on the fed funds rate.
Many homeowners who couldn't afford conventional mortgages were delighted to be approved for these interest-only loans. As a result, the percentage of subprime mortgages doubled, from 10% to 20%, of all mortgages between 2001 and 2006. By 2007, it had grown into a $1.3 trillion industry. The creation of mortgage-backed securities and the secondary market helped end the 2001 recession.
Many people didn't realize their payments would only remain at a low rate for the first three to five years. Greenspan raised rates in 2004 to fight 3.3% inflation. He raised them to 4.25% in 2005 and 5.25% by June 2006. By the end of the year, inflation was at a manageable 2.5%.
Greenspan's rate increase hit these mortgage-holders just when rates reset. Homeowners were hit with payments they couldn't afford. At the same time, housing prices began falling, so they couldn't sell either. That created massive foreclosures. By waiting too long to raise rates, Greenspan helped cause the 2008 financial crisis.
- Ben Bernanke (2006 - 2014) formally introduced the use of inflation targets as a way of setting public expectations of Fed actions. He used forward guidance to manage the public's expectation of inflation. His expertise was in the role of the Fed and monetary policy in the Depression. He created many new federal reserve tools to combat the 2008 financial crisis.
- Janet Yellen (2014 - 2018) started her tenure by tapering the Fed's purchases of Treasurys as she wound down quantitative easing. Instead of inflation, Yellen had to grapple with deflationary forces.
- Jerome Powell (2018 - 2022) was nominated by President Donald Trump. Since he's been a Fed board member since 2012, he's continuing to normalize interest rates. The Fed likes to have the fed funds rate at 2.0%. It gives the Fed the ability to lower rates if another recession occurs. It also allows banks to charge enough for loans to make a reasonable profit. Savers benefit from the higher rates, which especially helps retirees.
President Trump has criticized this policy and indicated he would prefer lower rates to spur growth. He even stated he wouldn't fire Powell, raising the specter that's he's been considering it. A president can only remove a Fed board member for "cause," not a disagreement over policy. There is no law over whether Trump could fire Powell as chair. If he did, he'd have to get the Senate's approval for a new nominee. On July 11, 2019, Powell said the law protects his position, and that he wouldn't leave if Trump did fire him.