How much power does Fed have?

NEW YORK – With the Federal Reserve chairman’s seat set to change hands soon, it’s time for a reality check. Just how powerful is the Fed?

To achieve its missions, the Fed regulates the money supply and increases or decreases short-term interest rates. More money plus lower interest rates are the tools of an “accommodative” Fed, a Fed trying to spark economic growth. If the Fed decreases the nation’s money supply and raises interest rates, it is tightening, trying to slow the economy and stave off inflation.

After 12 rate hikes in a row, the short-term federal funds rate is at 4 percent, a four-year high, and Wall Street watches the Fed with the rapt attention.

“We have said it before, and we shall say it again: The key to next year’s economic and financial market performance hinges upon the Fed not overreacting to the perceived inflation threat,” a recent Merrill Lynch research report said.

Citigroup’s Ajay Singh Kapur quotes an old market adage, “Economies don’t die of old age, they are always murdered by the central bank.” Eight of the last 12 recessions were preceded by Fed rate hikes, he said.

Nonsense, said Sandy Lincoln of Wayne Hummer Asset Management. “The Fed doesn’t create these cycles. … over the last 30 years, they’ve gotten it right more often than they’ve gotten it wrong.”