Welcome back to module two of yield curve analysis.

My name is Bill Addiss and w

e're gonna continue with our discussion now focusing on the Federal Reserve and
the impact the Fed has on the short end of the market. But before we talk about
interest rates and, and the impact of the market, I think we have to have a bett
er understanding of the Fed.
Now our central bank, the Fed as we know it today, is actually the third central
bank in the history of the US, and this most recent effort was established in 1
910. It goes back that far. I would also point out, although most people here in
the US are not aware of it, the Fed is a corporation.
There are shareholders in the Fed. The Fed is an example of what we call here in
the US an SRO, a self regulating organization. There are shareholders in the Fe
d and those shareholders are the commercial banks. Paradoxically, and some might
say in this certain conflict, the Fed is also the regulator over its owners.
The banks own the Fed, the Fed regulates the banks. This is an example of an SRO
, a self regulating organization. Now when the Fed was first created, as it stil
l is today, one of the common misconceptions is that we don't have one Federal R
eserve Bank. There are 12 separate Federal Reserve Banks here in the US.
There's a Federal Reserve Bank of New York. A Federal Reserve Bank of Boston, Da
llas, Atlanta, Richmond, Kansas City, Chicago, San Francisco, L.A.. There are 12
separate Federal Reserve Banks. And each Federal Reserve Bank was charged with
three mandates when they were created. Number one, supervision, as we said.
They supervise the banks headquartered in their area. So Citibank is Fed, is sup
ervised by Fed New York. Bank America is supervised by Fed Atlanta, cuz that's w
here their headquarters are. So supervision was one of the preeminent responsibi
lities of the Fed. Another responsibility of the Fed is literally keeping coinag
e in circulation, keeping money in supply.
As I'm fond of fa, saying, the, here in the US, the printing presses are not own
ed by the government. The printing presses are owned by the Fed. And that is an
important distinction I think I need to make right up front. You know, the Fed i
s not a part of the government.
It is a separate institution. So, when the Fed, the 12 Feds responsible for supe
rvising the banks in their area. They're responsible for keeping coinage in circ
ulation. Now more recently, Congress which was in the 1980s uncomfortable with t
his autonomous nature of the Fed. Congress did pass in the late 1980s the Humphr
ey Hawkins Act, and the Humphrey Hawkins did give the Fed two other responsibili
ties.
Responsibility number one was for keeping inflation under control. Responsibilit
y number two is holding the Fed accountable for unemployment. And it is with the
se two mandates that the chairman of the Fed now has to testify twice a year in
front of Congress. So, Janet Yellen recently concluded that testimony in Septemb
er and August of this year, and she will be required to appear bi-annually as a
result of that legislation.
Now, when we're worried about the Fed relative to the bond market, we're not con
cerned with the Fed. I'm mean, this has nothing to do with interest rates. When
we talk about the Fed relative to interest rates in the bond market, we're actua
lly talking about a committee of the Fed called the Federal Open Market Committe
e.
This is where the power is relative to the bond market, and this is where the po
wer is relative to monetary policy here in the US. Now, within the 12 Feds that
we have, each Fed elects a Fed president. So we have Fed, 12 Federal Reserve pre

sidents. On a rotating basis, five of those regional presidents are put on this
committee.
Now the New York Fed President is always on this committee on a non-rotating bas
is. So, the reason for that, quite frankly, is when the Fed wants to intercede i
n the market, when the Fed comes in to buy or sell treasuries as they do sometim
es on a daily basis, the Fed has one trading desk.
That desk is in New York. So the New York Fed President is always on this commit
tee. So five of the 12 regional presidents are on this committee. Then there are
seven members called the Board of Governors. Now the Board of Governors are pol
itical appointees. As a Board of Governor member, you are appointed by the Presi
dent, confirmed by Congress.
And as a Board of Governor member, you will serve a 14 year term. And the idea h
ere is, quite frankly, that no one president is necessarily going to stack the d
eck. So, on a rotating basis, they're serving 14 year terms as Board of Governor
members. On top of that, the President also appoints the chairman of this commi
ttee.
As we mentioned, Janet Yellen is presently the chairman of the FOMC. Before her,
it was obviously Chairman Bernanke and Greenspan before that. Now as chairman,
you serve a four year term. So Janet Yellen was appointed to a four year tenure
as a Board of Governor member. She will also serve, if she chooses, serves it ou
t, four years as Chairman of the Committee, and she could be reappointed.
So for example, under his tenure, Bernanke served three terms as Chairman, 12 ye
ars. He technically, after having left the chairmanship, could have stayed on an
other two years as a Board of Governor member. But like most Board of Governor,
past chairmans, he felt, if I'm not going to be chairman, why be on the committe
e?
So these 13 people, all right, make up the Federal Open Market Committee. They d
ecide, for example, where to put the Fed funds right here in the US. In the firs
t module, we talked about how the Fed kind of controls and owns the short end of
the market. That that decision to bring the Fed funds rate from five and a quar
ter where it was back in '07 all the way down to zero, was a decision of these 1
3 members.
The introduction of quantitative easing, rounds one, two, and three, was voted o
n by these members. They made the decision to turn on the printing presses and s
tart buying treasuries. And I would make you the argument that that makes these
13 people some of the most powerful people in the world.
Now I also have to discuss briefly the role of the chairman, because although th
e chairman is only one of 13 votes, the reality is as chairman you do, do, do, d
etermine a fair amount of the personality of the Committee. For example, in the
time that he was operating as chairman, Paul Volcker, had a completely different
philosophy than Bernanke after him.
Volcker's philosophy was we are inter-mediating in the market, we shouldn't tell
the market what it is we're doing. And when Volcker was the head of the FOMC, t
he Committee would make a decision that would affect monetary policy. The Commit
tee would disband and we wouldn't even know what the Committee had decided.
It would sometimes take us days if not weeks to figure out what it was the Fed h
ad done. Now when Greenspan and Bernanke came in as chairmans, they had a very d
ifferent philosophy. Their philosophy was one of much more an open Fed. And it w
as under their reigns that, for example, that when this committee meets, they no
w even hold a press conference in which they tell us what they've decided.

They're there to answer questions. Thirty days after the committee votes we even
get the minutes of the meeting so that we can see what the conversation was, wh
at the posture was of the different members. You know, it's under the Fed that m
ost of us has, have grown up with, it's a fairly transparent Fed.
But I do stress, they are under no responsibility to do any of that. The introdu
ction of the press conference, the press announcement itself, the releasing of t
he minutes. All of that has been added only under the last couple of tenures of
various Fed Chairmans, and there's nothing that says it has to be done that way.
So today, we really do have, continuing Janet Yellen, continuing the tradition o
f her immediate predecessors, we really do have a very transparent Fed as we ope
rate today.