The Chairman is appointed to a 4-year term by the President, subject to confirmation by the Senate. However, unlike other Presidential appointees (Secretary of State, Secretary of Defense, etc.), the Fed Chairman is selected as much for effective stewardship of the economy as for political philosophy.

Chairman of the Board of Governors

The exhibit to the right, commonly termed the Federal Reserve pyramid, indicates the connection between the Chairman of the Board of Governors and the rest of the Federal Reserve System. As the head of the Fed, the Chairman is positioned at the very top of the pyramid, heading the Board of Governors, and above the Federal Reserve Banks, commercial banks, and the non-bank public. Power and authority flows down from the Chairman to the rest of the Federal Reserve System.

One of Seven

The 14-year terms are staggered at 2-year intervals, with a new term beginning on February 1 of each even-numbered year. This means that a given President generally appoints 2 Governors during a 4-year term in office. And while an 8-year stay in office can result in a majority of 4 Governors appointed by a particular President, this majority would exist only for the last 9 months of the administration (February through October).

One of the Board members is selected Chairman, serving a 4-year term in that position, also using the Presidential appointment, Senate confirmation process. While the 4-year term of the Chairman is the same length of the 4-year presidential term, most presidents tend to inherit the Chairman appointed by a predecessor. If a prospective candidate for the Chairmanship is not already one of the 7 Governors, then an appointment must be made to a vacant position on the Board.

More than a Gavel

However, due in large part to restructuring during the Great Depression of the 1930s, the Chairman is now one of the most powerful economic positions in the United States and even the world. The Chairman generally sets the course of monetary policy and banking regulation. The wishes and policies of the Chairman need not be approved by the rest of the Board, but they typically are.

In addition to being the administrative head of the entire Federal Reserve System, the Chairman also serves as the head of the important Federal Open Market Committee (FOMC). The FOMC is charged with open market operations, the Fed's primary tool of monetary policy. This places the Chairman in charge of monetary policy.

Should the Chairman deem that the money supply should rise and interest rates need to fall, then in all likelihood, open market operations will be undertaken to increase the money supply and decrease interest rates.

Of course, the Chairman's desire to adjust the money supply and interest rates is based on extensive analysis of economic conditions, forecasts of the economy, and input from the Federal Advisory Council. Moreover, the ultimate decision on monetary policy and open market operations results from a majority vote of the Federal Open Market Committee. The Chairman, however, exerts a great deal of influence over the process.

Working with Others

The Fed Chairman also meets regularly with other domestic policy makers and regulators, including Congress, the Secretary of the Treasury, Chairman of the Council of Economic Advisors, Chairman of the Federal Deposit Insurance Corporation, and Comptroller of the Currency. The Chairman formally testifies before Congress twice a year to report on the state of economy.

As the head of the U.S. central bank, the Chairman also represents the United States in international matters, meeting with counterparts in other countries, including the heads of the Bank of England, the Bank of Japan, and Germany's Deutsche Bundesbank. The Chairman meets with other international policy makers with the International Monetary Fund (IMF), the Bank of International Settlements (BIS), the Group of Eight (G-8), and the Organization for Economic Co-operation and Development (OECD).

A Word or Two on Politics

However, the Chairmen are selected not so much for their intrinsic political ideologies, but for how this translates into monetary policy. Conservatives tend to view inflation as a bigger problem than unemployment, while liberals hold the opposing view. This means that conservative Fed Chairmen are prone toward tighter control of the money supply--that is, more contractionary monetary policy with higher interest rates--which is more likely to keep inflation in check. Fed Chairmen that have liberal leanings are inclined to have looser control of the money supply--expansionary monetary policy with lower interest rates--which is bound to reduce the unemployment rate.