Tyler Cowen on Fed nominees.28th April 2019
Tyler Cowen has a Bloomberg post that discusses what type of person should be nominated for a position on the Board of Governors at the Fed. It’s a good piece and I don’t see anything with which to to disagree. The essay clearly explains why people like Herman Cain, Steve Moore and Scott Sumner should never get near the Board. But there are a couple of omissions that I’d like to discuss:
1. Tyler omits one of the most important criteria—personal integrity.
2. The Fed’s structure should be changed. As with the Bank of England, there should be a committee composed entirely of experts on monetary policy, and another committee of experts on bank regulation. We don’t ask a single agency to do both securities industry and environmental regulations, so why have one committee do both monetary policy and banking regulation? The two fields are completely unrelated. Very few people are experts in both macro and micro.
3. A more decentralized Fed would allow more weight to be placed on expertise for monetary policymakers, and relatively less weight on managerial skills. Right now the Board basically runs the entire Fed, or at least the DC part of the Fed. That’s a big organization. I’d like a structure where having Bernanke or Yellen chair the monetary committee is just as effective as having Larry Summers chair the committee. Right now, Summers would be the more effective chair, for the various reasons that Tyler outlines (political/managerial skills, etc.) That’s unfortunate, as Bernanke and Yellen are slightly better monetary experts.
Of course even in my ideal system the chair of the monetary committee would need some managerial/political/communication skills, but certainly less than today. I’d like a structure where Bernanke and Yellen’s managerial skills are completely adequate, although I’m under no illusions that any plausible structure would make me a good candidate for the Fed.
Off topic, another Bloomberg piece had this to say:
At times last year Fed policy makers sounded open to using higher interest rates to lean against potentially over-exuberant financial markets, said Jonathan Wright, a professor at Johns Hopkins University and a former Fed economist.
Case in point: New York Fed President John Williams said in October that the central bank’s rate increases would help reduce risk-taking in financial markets, though he added that was not their principal purpose.
Such talk has since faded. “There doesn’t seem to be the same idea of having tighter monetary policy so as to lessen the risk of asset bubbles developing,” Wright said.
This isn’t surprising to market monetarists, who predicted that if the Fed tried to target financial stability they would lose control of their inflation/employment target. Fortunately, the Fed has seen the light. If only they’d asked us a few years ago and not wasted all that effort on the chimera of using monetary policy to prevent asset price “bubbles”.
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