Chair and Vice Chair: Happy Together?

What is the role of the Fed’s Vice Chair?

Fed Eccles Building, Washington, DC. Photo: APK. Source: Wikipedia. CC BY-SA 3.0

When the stock market crashed in 1987, the Fed’s Vice Chair Jerry Corrigan called newly confirmed Chair Alan Greenspan and told him, “Alan, there’s a crisis, and you’re it!” They quickly agreed to call an emergency meeting, after which the Committee issued a statement affirming “their readiness to serve as a source of liquidity to support the financial system.” This assured the markets that the Fed had their back—and helped avert a further meltdown.

There was little doubt that the Committee would agree to intervene, although this was unprecedented at the time. Corrigan was Greenspan’s “whip,” lobbying the members privately so they would have a united voice publically. The Vice Chair served as the Chairman’s enforcer.

In the Financial Crisis, Fed Chair Ben Bernanke had daily conference calls with three other Committee members: Don Kohn, Kevin Warsh, and Vice Chair Timothy Geithner. They became known as “The Four Musketeers”: Bernanke’s brain trust. Geithner had an iron will of his own, but was poorly suited to serve as an enforcer. Instead, he was a diplomat with an attitude, with connections to the Treasury Department and the Democrats in Congress. It was critical that the Government’s response to the unfolding crisis be well-coordinated.

The current Vice Chair, Stanley Fischer, seems to be Janet Yellen’s mouthpiece. She understands that her every statement is scrutinized and dissected. Fed watchers even used to try to divine the outcome of the deliberations by the size of the Chair’s briefcase. So she can’t float trial balloons. The Fed may be a Committee with 12 votes, but one vote counts a lot more. The Vice Chair, though, is just one voice among many.

Federal Open Market Committee. Source: Wikipedia

In a recent speech, Fischer describes his experience with “watchful waiting” as a monetary policy tool. When he headed the central bank of Israel they kept putting off a difficult decision on interest rates until the situation became more clear. Only that didn’t happen. “Don’t overestimate the benefits of waiting,” he notes. “There is always uncertainty.”

So, while we watch and wait for the Fed to decide when—not if—they should begin raising rates, we should consider the Vice Chair’s message: “It is never clear next time;” he notes. “It is just unclear in a different way.”

Douglas R. Tengdin, CFA

Chief Investment Officer

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