Presidents usually get the credit, or the blame, for the U.S. economy.
But since the Great Recession ended in 2009, the single most influential economic policymaker in Washington hasn’t been the president, or even a politician. It’s been two mild-mannered economists who’ve led the U.S. central bank, the Federal Reserve, in the past eight years.
The first was academic economist Ben Bernanke, who took over as Fed chair in 2006 and served until 2014, succeeded by economist Janet Yellen. With Yellen’s term ending soon, President Donald Trump is set to name a new person to lead the central bank Thursday, with widespread speculation centering on Jerome Powell, a lawyer, investment banker, and private equity executive who has served as one of the Fed’s governors since 2012. Powell is seen as a safe choice to follow Yellen, who was nominated by then-President Barack Obama in October 2013 and whose term runs out in February.
To understand why Powell is considered safe, you need to understand the Fed’s central role in the U.S. economy. Not many people do. In fact, a survey by Pew Research in 2014 found that only 24 percent of Americans knew that Yellen was then leading the U.S. central bank.
That’s why we’re presenting this brief explainer on what the Fed is, and why it matters.
What does the Fed do?
The Fed is best known for one job: raising and lowering interest rates to smooth out the ups and downs of the economy.
Why are interest rates a big deal?
Interest rates determine how much it costs to borrow money. That’s a big deal because borrowed money is the lifeblood of the U.S. economy.
All else being equal, if money is cheap, people are more likely to make investments in things like houses, industrial machines, and office buildings, which boosts the economy and puts people to work. Low interest rates also tend to help the stock market rise, something that particularly pleases this president.
So when times are tough, the Fed typically lowers interest rates, making money cheaper and giving the economy a shot in the arm. When the Fed raises interest rates, it’s intentionally trying to slow the economy down a bit.
Why would you want the economy to slow down?
To keep inflation from spiraling out of control.
Economists have long believed that if an economy is growing too fast, it can cause inflation to rise. So, if the Fed is worried about inflation, it raises interest rates to slow the economy down. (Unfortunately, this also throws people out of work and sometimes seems to send the U.S. into a recession.)
What is the Fed doing with interest rates now?
As expected, the Fed kept interest rates where they were—the target rate is between 1.00 percent and 1.25 percent—when it issued its latest interest rate decision Wednesday afternoon.
So, interest rates remain very low, but the Fed is slowly raising them, in a sign that they’re confident the economy is mostly healed from the financial crisis of 2008 and the deep recession that followed it. The Fed is expected to raise rates again in December.
Will a new head of the Fed change that?
Probably not. Powell, the new guy in charge of the bank is expected to largely stick with the Fed’s established pattern of slow interest rate increases, unless the economic picture changes drastically.
Will anything else change with a new head of the Fed?
The Fed has other jobs besides raising and lower interest rates. For instance it is an important regulator of banks. Outgoing Fed chair Yellen has publicly emphasized the Fed’s expanded role as a regulator in the aftermath of the financial crisis, saying that it has made the banking system safer. Powell has been slightly more lukewarm on regulation, but isn’t expected to be in favor of a large-scale push towards deregulation.
So, if nothing changes, why is Trump making a change?
Well, for one thing, Powell is a Republican. And he’s rich—something the president respects. In fact, according to the Washington Post, he’ll be the richest Fed chair since the 1940s. But the bottom line is that Trump would be nuts to try to introduce big changes at the Federal Reserve right now. The bank has been a key driver of not only economic recovery, but also the booming stock market, which the Trump has repeatedly cited as proof of the positive impact that his administration is having on the economy.
In other words, Trump is choosing to emphasize stability rather than chaos and confusion. And that’s a welcome development.