Does The Fed Keep Spiking The Punch?

This Wednesday, March 17th, we will learn about the Federal Reserve’s approach to the color green. Although the color is of course associated with that date’s St. Patrick’s Day holiday, it is also the color of American money. Financial markets will be on edge that afternoon, as investors seek clarity about the path of future monetary policy during the Fed’s statement, “dot plot” and comments by Chairman Powell during his ensuing press conference. The world’s investors will have their eyes fixed upon him.

Chairman of the Federal Reserve was once an uneventful job. From 1951 through 1970, the Federal Reserve’s Board of Governors was chaired by William McChesney Martin, Jr. He was a creature of the Establishment. His father helped write the Federal Reserve Act in 1913 before serving as a Fed governor and the head of the St. Louis Federal Reserve Bank. If anyone was ever born to head the Fed, it was the younger Mr. Martin. 

Despite his nearly two-decade tenure at the head of the nation’s Central Bank, Martin is best known for a 1955 quip. At an address before the New York Group of the Investment Bankers Association of America, he said “The Federal Reserve, as one writer put it… is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” Poor guy. He is remembered mainly for one quote, but it turns out he was actually paraphrasing someone else. Mr. Martin was indeed primarily a hard money central banker, who institutionalized much of the Fed’s decision-making and zealously guarded its independence. If any Fed Chair seems to epitomize a bygone era, it was Bill Martin.

With four different people in the role over the past 20 years (Greenspan, Bernanke, Yellen, Powell) it is hard to imagine any Federal Reserve Chair remaining in that position for that long. It is even harder to imagine a hard-money Federal Reserve. We need to go back several decades to recall one. Alan Greenspan, the first of those four mentioned earlier, also held the role for just under 20 years. He came into the job with inflation-fighting credentials and was known to have previously advocated for the gold standard prior to assuming his role at the Fed. Yet if he was a hard-money banker, circumstances forced him to abandon that stance almost immediately. The stock market Crash of 1987 occurred just two months after Greenspan was confirmed as Chair, and he famously responded by implementing highly accommodative monetary policies to avoid a stock market crisis becoming a broader threat to economic stability. 

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