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Answer: Dear Brendon,
Your question points out the most important, or at least the most visible action that the Federal Reserve Board takes – and that is to adjust interest rates. So we’ll discuss that in detail –- further down in this Q&A.
But first, I want to point out that although this is probably seen primarily as a “guy” thing, there have been women members of the Board, albeit not many. Case in point: Susan Bies, a long standing member, resigned in March of last year, that is, in 2007. Elizabeth Duke has been nominated to take her place but she has yet to be confirmed by the Senate.
The rest of the members are men. The Chairman, as you probably know, is Ben Bernanke. His term ends in 2010. Another term ending in 2010 is that of the Vice Chairman, Donald Kohn. Kevin Warsh is with the Board until 2019.
Randall Kroszner, who was appointed in 2006 as a fill-in, is awaiting Senate confirmation for a new 14 year term. That term officially began on February 1 of this year.
Frederic Mishkin will be leaving the Board in August to resume teaching at Columbia University. No one has been nominated to take his place.
That leaves Larry Kane. He was nominated to replace Mark Olson who resigned in June 2006. He, too is awaiting Senate confirmation.
It seems, doesn’t it, that it’s taking the Senate a long time to confirm members? A number of analysts think that the Democratic Senate is simply stalling on Bush nominees...hoping that a Democrat will be elected President in November. There’s no way to prove this, but...
Note: The head of the Senate Banking Committee is a Democrat from Connecticut, Christopher Dodd.
About Interest Rates
You’ve targeted the number one topic on most Federal Reserve Board agendas –- that the Board determines whether to raise or lower interest rates or leave them untouched. These interest rate decisions directly affect you as a consumer. (For the most part, only a simple majority is needed to pass a resolution, although in some cases, 5 votes out of 7 are required.)
The last interest rate vote took place on April 30. At that time the Fed cut rates by a quarter of a point, down to 2%. Following the meeting, Bernanke and others indicated they were finished cutting rates. We will see if that’s the case when the Fed meets again in late June.
So what “these guys” did in terms of another interest rate cut should have sent you several messages. First and foremost, that this is a good time to refinance your mortgage, provided that you have a high rate and that you’ll be staying in your house at least another 3 years or so. Second, it’s a good time to take out a home equity loan...but of course, only if you need to do so. It’s also prime time for small business loans.
The impact of lower rates also tends to make stocks more appealing. Many go up in price when rates go down as investors put their money in the market, rather than into low-yielding bank CDs, Treasuries, money market funds and savings accounts.
Beyond Interest Rates
The Board does more than adjust interest rates...
It also has the power to supervise various segments of the banking industry. Right now, it is looking at tightening the rules for credit card and mortgage lending, due to the recent sub mortgage debacle, in which thousands of people were given mortgages who did not have the ability to handle these loans under financial pressure. New regulations may be announced before year end.
And, in March the Board came up with a new policy that involved lending money to banks and other financial institutions who were squeezed for cash.
For Further Information
The Fed’s website explains in great detail (perhaps more than you would like) precisely how the Board operates. And, especially interesting for BUYandHOLD investors are the news briefs about recent action, the state of the economy, protecting yourself from a home foreclosure, etc. It’s all at: www.federalreserve.gov.
Good luck!
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