Thursday, October 5, 2017

Cowen on Fed Chair

Tyler Cowen has a good thought on the Fed chair question. The next chair has to be a good politician, in all the positive senses of that word, more than a good technocrat:
The Fed has functioned as a technocracy for a long time, but might the future bring a Fed that is irrevocably split between competing factions? ...the future could bring a Fed divided over how much it should assert its political independence, how much it should assume responsibility for possible asset bubbles, how it should respond to an international financial crisis, or how much it should align with an “America First” mindset. .... 
The backdrop is this: Ben Bernanke’s Fed, with its bailouts during the financial crisis, ate up a lot of the Fed’s political capital, though arguably for the worthwhile cause of saving the financial system. As a result, the Fed no longer has its pre-crisis credibility. As long as the American economy is on the path of a slow and steady recovery, with relatively high asset prices, that’s bearable. 
But the next time major economic volatility comes around, Fed decisions will be scrutinized and politicized like never before. This will happen in the mainstream media, on social media, and perhaps by our very own president in his tweets or offhand remarks. The key factor for any Fed leader will be the ability to maintain and project a coherent, unified voice at the Fed, so that the Fed remains an island of relative sanity in the polarized nation. This will be a problem of crisis management, but unlike Bernanke’s crisis management it will be fought first and foremost in the trenches of public opinion.
(The open vice chair positions are good ones for technocrats, who need to be able to translate the abstruse language of the staff.)

My related thought: We focus a lot on interest rate policy, but most of what the Fed does these days is financial regulation and supervision, and those decisions are likely much more important going forward.  The challenging question there is "macro-prudential." Is it the Fed's job to worry about "asset bubbles," and to micromanage "credit booms" and their eventual busts? Or is it better for the Fed to limit its authority, to preserve independence, credibility, and insulation from political demands for action and political criticism of its actions, by pronouncing there are economic events beyond its scope?

Moreover, if the Fed is to limit the scope of its financial dirigisme, it had better do so beforehand not afterwards. If everyone expects the Fed to set prices and bail out hither and yon, and then the Fed gets religion (perhaps under relentless political pressure), the crisis will be so much worse. Bernanke also benefitted from acting far beyond expectations of what he would or could do. The next chair will be in the opposite situation, have to set limits of crisis reaction, and disappoint expectations. It's much better to do that ahead of time -- and much harder for an institution like the Fed to scale back people's expectations, and to renounce and pre-commit against attractive-sounding powers.

Update: 

Narayana Kocherlakota predicts Jerome Powell. In line with some of the above thoughts, Narayana's view basically is that monetary policy is doing fine. Low unemployment, low inflation, low interest rates, low macro and financial volatility. Mission accomplished. Moreover, if there is a hawk vs. dove question, President Trump looks likely to be on the dove side of it. (Sadly, I doubt that rules and precommitment vs. discretion is ringing in the appointment decision.) However, supervision and regulation is the key issue going forward, and Narayana views Powell as Yellen monetary policy plus a regulatory/supervisory reform.

(I learned to use both words from Ms. Yellen's Jackson hole speech. Regulation is rules, supervision is sending Fed people to look over banks' shoulders. It's a good distinction.)

11 comments:

  1. As I recall the first round of bank "bailouts" were done by Congress under a Republican president. I lean to the view that TARP was good policy (except for the pork barrel stuff) but it was not the Fed.

    The Fed's program of buying commercial paper pushed the envelope of their statutory authority but IMHO constituted monetary policy in the traditional sense of backstopping liquidity and was appropriate.

    Short term interest rates went as low as they did as a result primarily of market forces and events outside of the United States and outside of the Feds control.

    QE3, again IMHO, went too far but the motivation was to thwart Congressional efforts to throw the economy in the toilet. It seems to have had small positive effects on the housing market and the overall economy. The effects on the financial markets are problematic but the size of those effects are uncertain.

    The great danger right now is that the "tin foil hat" crowd is in charge of economic policy at the White House and has significant representation in Congress and they want to spread their influence to the Fed.

    ReplyDelete
    Replies
    1. I think they're wearing gold foil hats.

      Delete
    2. "Tin foil hats" in terms of being inflation hawks? Is the Trump admin really hawkish on inflation?

      Delete
  2. Very good.
    Now, are you willing to put forth a name?
    About four years ago, when Janet Yellen was being considered, you suggested Thomas Sargent for Fed Chair.
    But that was then. Any suggestions for now? :-)

    ReplyDelete
  3. Ahem, Jerome Powell. Not "Gerome."

    I wonder if the Fed is "under pressure" or marches to its own drummer, or reflects "industry-capture" as much as anything. After all, what minute fraction of the population could ID Janet Yellen, let alone Fed policies?

    And if the Fed did have jump a bit when, say, a US President said so, would that be so bad?

    The Reaganauts repeatedly proposed placing the Fed into the Treasury Department.

    http://www.nytimes.com/1982/09/18/us/reagan-suggests-tighter-control-of-central-bank.html

    In many ways, Reagan was right. A President is judged by the economic performance on his watch---but if the uncontrollable Fed is too tight or too loose, the President bears the blame.

    Moreover, the present-day Fed is a horribly complicated arrangement that makes monetary policy opaque. In democracies, opaque is bad. There are accountability issues. How do I vote on Fed policy?

    The premise of central bankers today (and their right-wing allies) is that I do not have a vote on monetary policy. It is technocracy. Oh, how nice.

    The idea that monetary policy is technocratically made---well, really? The Fed says we are a full employment, anything tighter than 4.8% unemployment is too risky. Some Fed papers have stated we are arguably "past full employment."

    A 4.8% unemployment rate works out to about 1.5 people looking for a job, for every job opening.

    How nice.

    It's all technocratic, you see?

    ReplyDelete
  4. Valter Buffo, Recce'd, MilanOctober 6, 2017 at 2:54 AM

    Quote: Is it the Fed's job to worry about "asset bubbles," and to micromanage "credit booms" and their eventual busts? Or is it better for the Fed to limit its authority, to preserve independence, credibility, and insulation from political demands for action and political criticism of its actions, by pronouncing there are economic events beyond its scope?
    End of quote. In terms of principles, the answer is obvious.
    But:
    Quote: Bernanke also benefitted from acting far beyond expectations of what he would or could do. The next chair will be in the opposite situation, have to set limits of crisis reaction, and disappoint expectations.
    End of quote. Since asset price distortions are already here (documented) the Fed is forced to make choices about that. Based on recent communications, they at the Fed have no idea about how to do it: and consequences will follow, for the real economy as well. The reason is the following:
    Quote: As long as the American economy is on the path of a slow and steady recovery, with relatively high asset prices, that’s bearable.
    End of quote. Is Tyler assuming here that the former is independent from the latter?
    And: please define "relatively high". Would be nice to know about method.

    ReplyDelete
  5. Undoubtedly a better politician or more astute politician would be a big step forward. I think Janet Yellen has been a failure as Chairman. She appears equivocal with no idea of where the destination is located (as captain of the good ship lollypop). Lets get a few basics out of the way. The Fed needs to move to "normalization" as quickly as possible. Why? Low interest rates have been great for the 1% with their hedge funds etc, but they have created massive distortion in the markets and the economy (who is buying all those Uts, and Telecoms for dividends?). Yellen was on a path to raise rates but got dissuaded when China had a mini blowup, and then lost momentum. 1/4 point increases are not going to derail the US economy for quite some time. We need to get the yield curve back to a rational shape. If you think the US economy is so fragile that it can continue to grow only with accomodative policy, we are really in a heap of trouble. We need a leader who can lead not follow the tea leaves. Jon Chait (Lexington KY)

    ReplyDelete
    Replies
    1. In Victorian England, after a long period of peace and prosperity, rates on long government bonds were around 3%.

      With today's more efficient markets and longer life expectancies (and following 40+ years of global peace, progress and prosperity) we should expect rates on long government bonds to be even lower.

      Today's interest rates at the long and the short end reflect market forces more than policy choices. QE would have flattened the yield curve and little more. The Fed could undo QE simply by letting the long dated holdings mature over time and not re-invest the proceeds.

      Delete
    2. Or perhaps as Scott Sumner wouldd say, NGDP is still low, so raising rates isn't justified yet.

      Delete
    3. Or that raising rates is justified to lift NGDP.

      In economics, the causality path is not well defined.

      Delete
  6. John,

    I believe that it is Jerome Powell (not Gerome Powell).

    https://en.wikipedia.org/wiki/Jerome_H._Powell

    ReplyDelete

Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.