A lot of people know that Ben Bernanke is the Chairman of the Federal Reserve, but what does that mean? What is his job and why is it so important?
Here’s the sneaky truth—probably not all that many people really understand his job, and maybe we’re all afraid to admit it. But we shouldn’t be. It’s a complex if important job. Bernanke as Chairman leads the Federal Reserve, but what is the Federal Reserve? The technical answer is it is the central bank of the United States—or put more simply, it’s the government’s bank. Think of it this way: you, I, and many others each have a bank. The bank is where we put our money, the bank helps us manage our money with savings and checking accounts, and we can borrow money from our bank. Well, the Federal Reserve essentially performs these functions for the government. There is also one big thing a central bank like the Fed does. It manages a country’s currency—the Federal Reserve decides how much money is out there and sets the government’s short-term interest rates.
Why does he always talk about inflation and unemployment and all of those things? How does that fit into his job?
Think of it this way, your banker knows a lot about your financial health and can tell you at any time. So for a country, think of inflation and employment as key measurements of financial health. Low inflation—that is, stable prices—and low unemployment are good. High inflation—or skyrocketing prices—and high unemployment are bad. Just like your banker would prefer your financial health to be good, the Fed wants the United States to be strong financially. Those two things I’ve mentioned, inflation and employment, are in fact the Fed’s two key mandates. All of the complex things that the Fed does—they have crazy names like QE2 and Operation Twist—are ways to achieve those goals.
How is the Fed going to help the average American?
Perfect. Big picture: a healthy U.S. economy is what everyone wants. We all know that the economy is not growing as fast as we would like, which is keeping unemployment high. So the main tool the Fed is using right now is interest rates: the Fed is keeping them extremely low. Technically they control only government rates, but all rates really depend on those. So low rates make it cheaper to borrow money—to buy a car, to buy a house, to start a business, whatever. Low rates should spur growth. Growth creates jobs—which obviously lowers unemployment. So if you don’t happen to have a job, growth will help you get one. If you already have a job, growth will help your paycheck increase. So if Bernanke is reading the economic signs correctly, and he implements the right policies, we should see growth and falling unemployment. Personally, I happen to think he’s doing really well with a tough job.