How powerful is the Federal Reserve?

This is nonsense, said Sandy Lincoln, chief market strategist at Wayne Hummer Asset Management in Chicago.

There are factors that are far beyond the Fed’s control, Lincoln said, such as the introduction of the euro, the globalization of the economy and the current sharp increases in commodities prices.

“The Fed doesn’t murder economies,” he said. “The Fed doesn’t create these cycles. ... They can get it wrong, but over the last 30 years, they’ve gotten it right more often than they’ve gotten it wrong. At the critical time, they really got it right.”

For instance, former Fed chairman Paul Volcker hiked rates “to a fare-thee-well” after inflation spiked in 1981, Lincoln said. Greenspan acted decisively after the Black Monday market crash in 1987. The Fed reassured investors the day after Black Monday by saying it would serve as a source of liquidity. The president of the New York Fed, E. Gerald Corrigan, persuaded banks and securities firms to continue to extend credit and settle trades.

Most people haven’t heard of Corrigan, who left the New York Fed in 1993, after 25 years with the Federal Reserve system, but he played a key role in saving the day.

“We’ve attributed all kinds of powers to the Fed chairman,” Krosby said, but the Fed works as a team and the team today “is very experienced. Not just the chairman, but the governors and the staff.”

While investors are growing impatient with the Fed’s rate hikes, it’s important to remember that at the start of this tightening program, rates were at a 45-year low. “It was like war time,” Krosby said.

What the Fed is trying to do is take the air out of the housing bubble, slow down the larger economy and see employment edge slightly lower.

“The key is a slowdown, not a crash,” she said. Still, when the Fed has finished, people will get hurt, she said.

Speculators could be in particular trouble. “The more leveraged you are, the more vulnerable you are to losing,” she said. “Instead of flipping condos, you could be flipping burgers — and I don’t think the Fed cares. What the Fed cares about is the average American.”

Even those who believe in the Fed’s super powers don’t necessarily think the Fed is an institution to fear.

“Think of this Fed-induced slowdown like hitting the ’Reset’ button on the economy,” Wood wrote. “Short term it can be grueling, but longer term (it is) good for stocks: It lowers interest rates, lowers inflation, works of excesses and creates the expectation for increased corporate profits. Mostly, it will get the Fed off our back.”

What he’s saying is that only the Fed can call off the Fed.

Now, that’s power.

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