From The Panic Of 1907 To The Pandemic Of 2021: The U.S. Federal Reserve In Faces And Events

Every trader who has ever traded currency pairs on Forex, invested in stocks or cryptocurrencies, conducted CFD transactions with gold or oil, has heard of the U.S. Federal Reserve System (FRS). Even if this trader is a fan not of fundamental but exclusively technical analysis, the effectiveness of their calculations and graphical constructions will depend on the decisions made by the FRS. After all, it is these decisions that shape or, conversely, break both global and short-term trends in financial markets. So, what is the organization behind the U.S. Federal Reserve System? Child of Bankers’ PanicThe roots of the Federal Reserve System (FRS) trace back to the end of the 19th century when, in 1886, a group of millionaires purchased Jekyll Island, located in the state of Georgia, and transformed it into a private club. Families holding a sixth of the world’s wealth, such as the Astors, Vanderbilts, Morgans, Pulitzers, and others, would vacation on this island.Membership in the club and access to this island were limited to very few. For instance, the future Prime Minister of the United Kingdom, Winston Churchill, was denied membership. The future U.S. President William McKinley was also not accepted into this highly elitist closed community.During this time in the United States, debates arose about creating a centralized system to manage financial activities. This was prompted by four major financial crises that shook the country between 1873 and 1907. Initially, the idea of establishing a central bank was met with extreme negativity. However, the “Panic of 1907,” also known as the “Bankers’ Panic,” changed everything. A crisis erupted due to an attempt to take over shares of one of the largest banking corporations, spreading throughout the country. It led not only to the collapse of the New York Stock Exchange by almost 50% but also to the widespread bankruptcy of banks and businesses, and a rise in unemployment.As mentioned earlier, at that time, the United States did not have a central bank that could regulate currency circulation and prevent panic. Therefore, the government turned to private bankers, particularly to J.P. Morgan, a resident of Jekyll Island (who hasn’t heard of J.P. Morgan Bank). He assembled a coalition of major financial institutions and provided the necessary funds to stabilize the situation. Interestingly, Morgan is considered both the organizer of this crisis: he started the fire, and the one who extinguished it.The events showed that the American banking system needed reform and the creation of a central body that could coordinate the actions of commercial banks, ensuring the liquidity and safety of deposits. The U.S. Congress established the National Monetary Commission, which was tasked with investigating the instability of the country’s banking system. In 1913, a law was enacted that established the Federal Reserve System (FRS) – an independent federal agency to perform the functions of a central bank. 1913-1951: Stages of FormationAt that time, the Federal Reserve System (FRS) consisted of 12 regional Federal Reserve Banks (FRBs), each with its own president, and the Board of Governors of the Federal Reserve System (FRS Board), appointed by the U.S. President and confirmed by the Senate. The FRS Board was responsible for overall guidance and supervision of the activities of the FRBs. Its responsibilities also included setting the discount rate at which the FRBs provided loans to commercial banks. The FRBs, in turn, performed functions such as holding reserves for commercial banks, issuing banknotes, conducting open market operations with government securities and other agencies, as well as regulating and overseeing the activities of commercial banks in their regions.In 1933, during the Great Depression, the Banking Act was enacted, introducing the Federal Deposit Insurance System, prohibiting commercial banks from engaging in investment activities, and expanding the powers of the FRS. In 1935, another law was passed, creating the Federal Open Market Committee (FOMC), which became the primary body for formulating monetary policy. This Committee was granted the authority to conduct open market operations with securities, influencing the money supply and interest rates in the economy. Thus, it became a key tool for the U.S. Federal Reserve to regulate currency circulation and lending.Today, the Committee consists of 12 voting participants, including all seven members of the Board of Governors of the Federal Reserve System, and the presidents of the five FRBs. The President of the Federal Reserve Bank of New York is a permanent member of the FOMC, while the presidents of the other four FRBs undergo annual rotation.In 1951, an agreement was reached between the Federal Reserve and the U.S. Department of the Treasury, known as the Treasury-Fed Accord. According to this agreement, the Federal Reserve gained complete independence from the government in matters of monetary policy and ceased to support a fixed yield on government bonds. This allowed the Federal Reserve more flexibility in responding to changes in the economy and using its own tools to achieve its goals: price stability, economic growth, full employment, and balance of payments stability. Achievements and FailuresSince its creation, the Federal Reserve System has been led by 16 individuals, each with their own history of successes and failures. Let’s talk about those who have headed this institution over the past half-century.– Paul Volcker: It cannot be said that the actions of the Federal Reserve were always unequivocally successful. For example, in 1979, amidst high inflation and a recession, under the leadership of Paul Volcker, the regulator changed its monetary policy strategy, shifting focus to limiting the growth of the money supply rather than managing interest rates. This led to a sharp increase in the federal funds rate, reaching 20% in 1981. While this successfully tackled inflation – dropping to 3.2% in 1983 – it also caused a deep recession, high unemployment, and financial difficulties for many banks.– Alan Greenspan: In 1987, Alan Greenspan was appointed as the Chairman of the Board of Governors of the Federal Reserve, becoming one of the most influential and long-serving leaders of the central bank. He implemented a soft and flexible monetary policy that contributed to economic growth, low inflation, and financial market stability.Greenspan also faced several serious challenges and crises, including the stock market crash in 1987, the bankruptcy of the hedge fund LTCM in 1998, the bursting of the dot-com bubble in 2000, and the terrorist attacks on September 11, 2001. According to many politicians and financiers, in all these cases, he acted decisively and promptly, lowering interest rates, providing liquidity, and supporting the financial system, restoring confidence in the economy. Greenspan retired in 2006, handing over his position to Ben Bernanke.– Ben Bernanke, an economist, and professor specializing in the history and theory of monetary policy, particularly the study of the Great Depression, had to lead the Federal Reserve during the global financial crisis of 2007-2009. This crisis, the most serious since the 1930s, threatened to collapse the entire global economy. It was triggered by the explosion of the mortgage credit market bubble and spread to all sectors of the economy and finance.Bernanke utilized all available tools at his disposal to prevent a collapse and contribute to the economic recovery. He initiated a program of quantitative easing (QE). To stimulate investment and consumption, Bernanke lowered the interest rate practically to zero, provided loans and guarantees not only to commercial banks but also to other financial institutions such as investment banks, insurance companies, and automotive corporations.Ben Bernanke also collaborated with international organizations, such as the International Monetary Fund (IMF) and the Group of Twenty (G20), to coordinate anti-crisis measures. Thanks to these actions, the Federal Reserve was able to prevent the collapse of the financial system and contribute to the gradual recovery of the economy. However, these actions also faced criticism, as the rescue of unreliable financial institutions occurred at the expense of taxpayers’ money.– After stepping down in 2014, he was succeeded by Professor Janet Yellen – the first woman in this position in the past 100 years. She continued the approach of implementing a soft and flexible monetary policy until the U.S. economy achieved sustainable growth and reduced unemployment. Yellen also paid significant attention to issues of financial stability, regulation, and supervision of the banking system. She advocated for social justice and equal opportunities and was highly praised for her competence, experience, and humanity.– In 2018, Janet Yellen was succeeded by Jerome Powell, appointed by President Donald Trump. In 2020, Powell faced an unprecedented crisis caused by the coronavirus pandemic, leading to a sharp contraction in economic activity, increased unemployment, and a decline in financial markets. Powell responded swiftly and decisively, resuming the quantitative easing (QE) program, lowering interest rates almost to zero, and launching a series of special credit programs to support businesses, state and local governments, as well as financial markets.In 2021, Powell witnessed the recovery of the American economy due to progress in vaccination, the lifting of restrictions, and extensive fiscal stimuli. However, he then faced new challenges such as rising inflation, labour market instability, and geopolitical risks, prompting a shift in the Federal Reserve’s monetary policy towards tightening (QT). Scandals and OdditiesIn addition to successes and failures, some of the leaders of the Federal Reserve became known for amusing incidents and, at times, scandals. – William McChesney Martin (1951-1970) is known not only as the longest-serving Chairman of the Federal Reserve, holding the position for almost 20 years, but also as a person who often made sarcastic and caustic jokes at press conferences. Once, he defined his institution as follows: “The job of the Federal Reserve is to take away the punch bowl just as the party gets going.”– Arthur Burns (1970-1978) faced difficulties in managing inflation and unemployment during the oil crisis. He was also involved in the “Watergate” scandal when it was revealed that he lowered interest rates at the request of his close friend, U.S. President Nixon, to help him get re-elected.– Paul Volcker (1979-1987) was known for his love of cigars, towering height of 2.01 meters, and the habit of wearing identical suits and ties to save time on choosing clothes. The tough measures he took to combat inflation, raising interest rates to a record 20%, sparked widespread dissatisfaction. In response, angered farmers even attacked the car in which Volcker was traveling, demanding a reduction in the stifling cost of credit.– Alan Greenspan (1987-2006) became famous for his complex and convoluted speaking style, often referred to as “Greenspeak.” He frequently used ambiguous and double-meaning expressions to avoid giving clear forecasts or signals about the future policies of the Federal Reserve. One of the most well-known quotes attributed to him is: “If you understood what I said, you would probably be confused.”– Ben Bernanke (2006-2014) faced sarcastic remarks after unknown individuals stole the check book of the head of the American central bank and withdrew around $9,000 from his account.– Jerome Powell (Chairman of the Federal Reserve since 2018) has also fallen victim to several fake news stories and fraudulent schemes in which scammers used his name and photo to deceitfully lure people into giving away their money.More By This Author:Forex and Cryptocurrencies Forecast for December 04 – 08Forex And Cryptocurrencies Forecast For Nov. 27 – Dec. 1Forex And Cryptocurrencies Forecast For Nov. 20-24


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