Most people expect the Fed to raise interest rates Wednesday afternoon. But it has never been as simple as the central bank just declaring it so. After policymakers make their decision on interest rates, an army of Fed staffers works behind the scenes to actually make it happen. In that past, that has largely meant buying and selling Treasury bonds. But in a world awash with money, the Fed needs new tricks. And since we’re in brand-new territory, there’s no guarantee they’ll work.
Questions about whether the Fed’s new tools will perform as planned are putting a spotlight on Simon Potter, who runs the Markets Group at the Federal Reserve Bank of New York. He leads a team of traders who interact with financial institutions. Their goal is to hit the interest-rate targets set by the policymakers in Washington. Plenty is at stake. If what Potter’s team has planned doesn’t keep interest rates in line over time, markets could lose confidence in the Fed.
People tend to fixate on one word in Potter’s biography: British. They talk about his Oxford degrees, dry wit and other signifiers of his birthplace, intrigued by the idea of a British-born economist in a huge role at America’s central bank.
“I think he probably regards himself as more of an American at this point than he does a British person,” said Gary Hansen, an economics professor at UCLA, where Potter was until leaving to join the Fed in 1998.
It’s really not that odd that Potter — consistently described as smart and capable — would have a high-level post at the Fed. After all, the entire Bank of England is run by a Canadian. What’s surprising is not where he was born, but rather what he did before he came to run the Markets Group.
“When he was named, it wasn’t obvious to me,” remembered Alan Blinder, a former Fed vice chairman. “Not because Simon’s not smart and capable. He is, in abundance. But his career was as a research economist. He was not a market technician.”
Simon Potter’s background is theory, as a professor and author of weighty papers. But his task recently has been very much practice, overseeing trading that connects the Fed with markets. Wall Street can be pretty skeptical of academics, worried they just don’t get the messy world of financial markets. But Potter gradually won over doubters, gaining respect for being able to effectively blend the worlds of theory and practice.
“He blends a great understanding of the markets, with a good, healthy academic perspective on finance,” said Carl Tannenbaum, who worked with Potter at the Fed and is now chief economist for Northern Trust. “So it gives me a certain amount of confidence that the Fed will be able to handle the steering of the Fed funds rate as we move away from zero well, knowing the gentleman who is going to be leading that effort.”
Potter’s team has been practicing for what’s to come. But whether their moves work is theoretical. This in many ways may be the perfect challenge for Potter at a pivotal moment. He began in the pristine world of theory and now finds himself knee-deep in the muck of practice, with the Fed’s very credibility in the balance.
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