In general, it is assumed that the chair of the Federal Reserve Board is the leader of the Fed. But is that necessarily the case? During the 1920s, Benjamin Strong was effectively the leader of the Fed, despite being merely the president of one of its regional banks (the admittedly important New York Fed). Nothing in the Fed rules made him the leader of the Fed; he achieved that position by being a “strong” leader.The most important Fed decisions are made by the Federal Open Market Committee (FOMC), which includes the 7-member Board of Governors, the New York Fed president, and four other regional bank heads (which vary over time). FOMC decisions are made by majority vote—with the chair having no more formal power than the other 11 members.
To truly understand the Federal Reserve, you need to look at the informal structure. There are two key facts to keep in mind:
Although the Fed chair has just one vote on the FOMC, the votes of other FOMC members usually (not always) align with the chair’s view.
Although the power to set the all-important interest rate on reserves is formally granted to the 7-member Board of Governors, there is currently an informal agreement that the decision will be made by all 12 members of the FOMC.
This is how things are done today. But things can change! Suppose a president appointed a clearly incompetent person to chair the Fed, a lackey who would do the president’s bidding. In that case, I’d expect the nomination to be rejected by the Senate.
But let’s suppose the unqualified nominee was approved. What then? The other 11 members of the FOMC might choose to align with a “shadow chair”, someone who would provide guidance as to the appropriate stance of monetary policy. In that scenario, the newly appointed chair’s views would be ignored. But how would the FOMC agree as to which member should become the shadow chair?
Think about focal point theory. There’s one obvious choice—the former chair of the Fed. The other 11 members of the FOMC are perfectly free to continue voting as if nothing had changed, as if the former chair had not been replaced.
One objection to this idea is that former chairs usually resign from the Board after their term as chair ends. But it doesn’t have to be that way. Under very unusual circumstances, a former chair might remain on the Board and continue providing leadership on the direction of policy. They would be especially likely to do so if their replacement were clearly unqualified.
This story caught my eye:
Powell’s term as chair expires in May 2026. His underlying role as a governor continues through January 2028. Asked at Wednesday’s press conference whether he would also step down from the board when his chair term ends, he declined to answer.
A shot across the bow?
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