4.3 Structure of
the Federal Reserve System
85
William Martin’s tenure as chair has been the longest in Fed history. He focused on main-
taining the Fed’s independence from Congress and the president. The 1970s were a particularly
diffi
cult decade from an economic standpoint in the United States. Infl ation was increasing at
a rapid rate. Oil price shocks occurred in 1973–1974 and again in 1978–1979. Wage and price
controls were tried with no success. Arthur Burns served as chair throughout most the 1970s
until his term expired in 1978. President Jimmy Carter nominated William Miller as chair, but
he served only one year. By 1979, public confi dence in Carter was very low. Reactions in the
fi nancial markets in New York City also suggested concern over
whether the president could
control infl ation.
In July 1979, Paul Volcker’s name had surfaced as a possible chair of the Fed who could
ably fi ght infl ation in the United States. Volcker was an economist who had served as president
of the New York Federal Reserve Bank and was well known on Wall Street. Volcker also had
served in government positions in the Kennedy, Johnson, and Nixon administrations, and he
had worked as well as in commercial banking with Chase Manhattan.
While Volcker
had impressive credentials, some of the comments gathered by the Carter
administration included, “rigidly conservative . . . very right-wing . . . arbitrary and arrogant . . .
not a team player.”
3
While the Fed is legally independent from the White House, it is normal
for the Fed chair to work with a president’s economic advisors in a joint eff ort to reach certain
economic objectives. Of course, there are times when it might be
in the best interest of the
people if the Fed pursues its own direction in applying monetary policy to achieve objectives
such as lower infl ation.
History shows that under the guidance of Paul Volcker, a restrictive Fed policy brought
down the double-digit infl ation of the 1970s and the early 1980s. Volcker dominated the board
during his tenure, and the Federal Open Market Committee consistently responded to his
leadership. When Volcker resigned as chairman in June 1987, the fi nancial
markets reacted
negatively. The U.S. dollar fell relative to other currencies, and U.S. government and corporate
bond prices fell. Why? In a word—uncertainty; that is, uncertainty about the future direction
of monetary policy. Volcker was a known infl ation fi ghter. In contrast, the policies of the
incoming Fed chair,
Alan Greenspan, were unknown.
Greenspan was viewed as a conservative economist. He served as an economics advisor
to President Gerald Ford and as a business consultant. Greenspan’s fi rst big test was the stock
market crash of October 1987. He responded by immediately pumping liquidity into the bank-
ing system. The result was avoidance of monetary contraction and asset devaluation of the
kind that followed the stock market crash of 1929. A reversal of policy occurred in mid-
1988 when interest rates were raised to fi ght increasing infl ation. A relatively mild recession
occurred during 1990–1991. However, infl ation has been kept below the 3
percent level since
then. During Greenspan’s service as chair of the Fed BOG, there was real economic growth
in the U.S. economy, interest rates declined to historic lows, and stock prices reached all-time
highs. A 1996 survey of more than two hundred chief executive offi
cers of the largest U.S.
corporations gave overwhelming support for the “good job” that Greenspan was doing. Since
then, the business and fi nancial sectors of the United States have maintained their strong sup-
port of Greenspan’s Fed leadership. In 2004, Greenspan was nominated
by President George
W. Bush and confi rmed by the U.S. Senate for a fi fth and fi nal four-year term as chair of the
Fed. A Fed policy of high monetary liquidity and low interest rates was established during the
early part of the decade of the 2000s in response to an economic downturn that was exacer-
bated by the September 11, 2001, terrorist attack. This easy money policy was continued
through Greenspan’s tenure, which lasted through January 2006.
Ben Bernanke became chair of the Fed BOG in February 2006. It was only a few months
before the housing price bubble burst and the economy started slowing down. Bernanke was
responsible for establishing monetary policy that helped guide the
United States through the
“perfect fi nancial storm” involving the 2007–08 fi nancial crisis, which had placed the U.S.
economic system on the verge of collapse,
4
and the subsequent 2008–09 Great Recession. Ben
Bernanke led the setting of monetary policy until early 2014.
3
William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country, (New York: Simon and Schuster,
1987), p. 35.
4
For an interesting personal experience perspective of working with the Fed chairs, see Stephen H. Axilrod, Inside the
Fed, (Cambridge: The MIT Press, 2009).
86
C H A PT E R 4 Federal Reserve System
Janet Yellen assumed offi
ce in February 2014. Prior to becoming chair of the Fed BOG,
she served as vice chair from October 2010 until she was appointed Fed BOG chair. Yellen
is viewed as being a Keynesian economist who favors the use of monetary policy to manage
economic activity over the business cycle. She inherited from Ben Bernanke the Fed’s easy
monetary policy developed to address the 2007–2009 fi nancial and economic crises. She also
participated in the subsequent continuing quantitative easing policies during her role as vice
chair. However, after seven years of easy money policies, the Fed moved in December 2015
to start increasing interest rates.
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