Salem Business Journal
SALEM, OREGON
MARCH 2014
VOL. 10, NO. 3
Let’s Talk: W. Ray Sagner CFP
What’s The Fed, Where’s Ben and Who’s Yellen?
The first thing you learn about writing a story is to capture the reader’s attention with
your opening line, so here goes. “The Fed” is a term that we often hear on news
programs, that most viewers don’t know what they do other than print money. If that
line does not keep you going just stick with it, there is a payoff at the end. The
following is a quick summary of the Fed created in 1913, with the enactment of the Federal Reserve Act.
The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central
bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible,
and more stable monetary and financial system.
The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act:
Maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are
sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years,
and today, according to official Federal Reserve documentation, include conducting the nation's monetary
policy, supervising and regulating banking institutions, maintaining the stability of the financial system and
providing financial services to depository institutions, the U.S. government, and foreign official institutions.
The Fed also conducts research into the economy and releases numerous publications, such as the Beige
Book we hear about. The Beige Book, more formally called the Summary of Commentary on Current
Economic Conditions, is a report published by the United States Federal Reserve Board eight times a year.
The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors
(or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve
Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and
various advisory councils. The FOMC is the committee responsible for setting monetary policy and consists
of all seven members of the Board of Governors and the twelve regional bank presidents, though only five
bank presidents vote at any given time (the president of the New York Fed and four others who rotate
through one-year terms). If you have been watching the news lately you know that Ben Bernanke has
finished his stint as the Chair of the FOMC and Janet Yellen a member of the board was chosen to the
chair position, more about them in a moment. The Federal Reserve System has both private and public
components, and was designed to serve the interests of both the general public and private bankers. The
result is a structure that is considered unique among central banks. It is also unusual in that an entity
outside of the central bank, namely the United States Department of the Treasury, creates the currency
used. According to the Board of Governors, the Federal Reserve System "is considered an independent
central bank because its monetary policy decisions do not have to be approved by the President or anyone
else in the executive or legislative branches of government, it does not receive funding appropriated by the
Congress, and the terms of the members of the Board of Governors span multiple presidential and
congressional terms."
There is no question that Chairman Ben Bernanke has made his mark at the Federal Reserve (Fed). Over
the years, there have been a variety of terms used to describe Bernanke’s behavior and mindset.
Journalists and investment professionals were given plenty of fodder to aid in the process. During the
course of two terms as Chairman of the Federal Open Market Committee (FOMC), Bernanke had to
orchestrate his way through varying scenarios—including some that a right-minded person would not wish
upon your worst enemy.
“Helicopter Ben” was an early label, referring to his ease with printing money. At other times, song titles
were used as labels. “When Doves Cry” was popular at a time when there was heightened rhetoric around
the low-interest-rate policy, as the Fed made efforts to keep rates down for an extended period of time.
“Where Have all the Good Times Gone” was a title used in referring to policy actions and market activity
following FOMC announcements.
It is unquestionable that Bernanke set a new precedent as chairman, acting in a unique and groundbreaking manner that had significant impact on the economy and markets. There were multiple goals that
he floated across the markets from his desk. First was an effort to keep the U.S. economy (and, depending
on how you look at it, the global economy) afloat. In conjunction with this, there were three iterations of
quantitative easing, including Operation Twist (which was just a fancy way to say the FOMC was
repositioning bond holdings along the yield curve). Following that, there were a variety of facilities crafted
to maintain market liquidity and keep everything working in an orderly fashion. Increased transparency
was also a key initiative. The goal was to provide investors the best possible insight into the FOMC’s
mindset. This was accomplished by holding regular press conferences following the Committee’s meetings.
Leadership will now transition to Janet Yellen, and the change at the helm should be seamless. Yellen was
involved in the quantitative easing process. She and Bernanke hold similar views; some say she may even
be a bit more dovish—which, as a bond investor, is welcomed.
It can be said with certainty that the removal of accommodation (reducing the amount of treasury bonds
being bought) will happen; the unresolved question is the pace at which it will occur. Choppy economic
data suggests that a slow, methodical removal of bond buying is likely. This type of tapering should fall in
line with Yellen’s dovish tilt. It is important to remember that tapering does not equal tightening. It is the
view of some financial analyst that neither the markets (both equity and fixed) nor, more importantly, the
economy are ready for tightening to commence. The last thing anyone at the FOMC wants to accomplish is
uncertainty among investors, as there is enough of that going around already. So farewell Ben; may your
policies, precedents and perspectives remain in place.
The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used,
as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to
inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The
Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by
email at [email protected] You may view the Company’s web site at WWW.TheLegacyGroup.com