What they decide determines monetary policy for the $17 trillion US economy and can trigger changes in interest rates, foreign exchange rates, employment and the price of goods around the world.
Now, with Janet Yellen at the helm — the first female in their 100 year history — the Fed is about to start winding back stimulus measures which could have a massive impact on Australian markets, including everything from how much your mortgage costs to where you go on holiday.
Confused? This is how it works.
It’s run by a Board of Governors and Federal Open Market Committee (FOMC) responsible for setting monetary policy in the US covering everything from lending rates to reserve requirements and regulation of the banking system.
Their huge scope means what they do impacts every other financial market in the world, ensuring economists hang on their every word and traders make or lose billions by their decisions.
Westpac economist Elliot Clarke said the Fed is the bedrock of the global financial system and their decisions are “very very important” for the Australian economy.
“They’re considered a baseline for markets, it’s up to market economists to add more colour,” he said.
The FOMC is usually made up of 12 people, including seven from the Board of Governors and five from Federal Reserve banks around the country. But at the moment there are just 10 people due to vacancies in certain seats.
These are the 10 members of the FOMC for 2014
• Janet L. Yellen, Board of Governors, Chair: Former economics professor who previously served as vice chair under Bernanke and is said to be keen to tackle unemployment.
• Jerome H. Powell, Board of Governors: Has a law degree and once served as assistant secretary and undersecretary of the treasury for George Bush.
• Sarah Bloom Raskin, Board of Governors: Took office in 2010 after serving as commissioner of financial regulation in Maryland.
• Jeremy C. Stein, Board of Governors: Former Harvard economics professor who has previously been secretary of the treasury and on staff at National Economics Council.
• Daniel K. Tarullo, Board of Governors: Law professor who was President Clinton’s assistant on international economic policy.
• William C. Dudley: Sits on the FOMC permanently as president of New York Federal Reserve and was previously managing partner and economist at Goldman Sachs.
• Richard W. Fisher: President of Dallas Reserve Bank who grew up in Mexico and started his own companies before selling controlling interests when he went into government.
• Narayana Kocherlakota: Baltimore native who was economics professor and research economist at Reserve Bank of Minneapolis before rising to become president.
• Sandra Pianalto: Italian-born economist started out as in the research department in 1983 and rose to become boss at the Reserve Bank of Cleveland.
• Charles I. Plosser: Former Stanford professor who worked as a consultant to high profile companies and banks before becoming President of Reserve Bank of Philadelphia.
What’s it to me?
Since the financial crisis, the central bank has embarked on three distinct phases of “quantitative easing,” a program of purchasing treasury bonds and mortgage backed securities designed to help the US economy recover its strength.
The last phase, known as Operation Twist, began in September 2011 has seen the Fed provide $85 billion worth of stimulus every month from January to November 2013. However they’re now looking to wind this back, dropping it to $75 billion in December 2013 and $65 billion in January 2014.
Mr Clarke said the Fed expects to reduce this by $10 billion a month until the economy can stand on its own two feet, relying on “incomes and regular activity drive the economy rather than just excess liquidity.”
“Any data and decision within expectations doesn’t tend to impact markets all that much. What is actually a contractual shift in policy can be seen as a positive. It really is to do with market psyche and how this expectations or piece of data impacts markets going forward,” he said.
However as the Fed is essentially turning off the money tap and hoping for the best, there is a major risk it won’t proceed as expected.
“Our general concern is its [the US economy] is not as strong as people make it out to be. There is a risk that the Fed won’t be able to continue to taper and markets might react in a different way, we might actually see a much more prolonged period of tapering,” he said, which would mean the Aussie dollar remaining at current levels.
“Our purchasing power would actually be staying around the same level rather than deteriorating. That’s a positive for Australian consumers.”
However this could provide a risk to markets, where fears over US growth have a negative impact.
“Concerns over the US growth trajectory gets market participants scared and they tend to want to reduce their exposure to risk which means they sell equities,” he said.
“It’s just really all about market expectations and how they relate to the data we see. Without those that factors you’re likely to see continuation in a range around the current level.”
news.com.au 10 Feb 2014