An unelected and anonymous cabal of bankers

Economists increasingly agree that “monetary policy” is not about tweaking the current fed funds rate, but rather the expected future path of policy.  We are now seeing signs that the press also understands Woodfordian monetary economics.  Here’s Greg Ip:

The statement released by the FOMC was largely as expected and a non-event for markets: “economic growth [will] remain moderate over coming quarters and then … pick up gradually,” inflation will fall from its temporarily elevated levels to 2% or lower, and the Fed expects to keep interest rates “at exceptionally low levels … at least through late 2014.”

The projections released along with the statement were far more interesting. FOMC members reduced their forecasts for the unemployment rate, and nudged up the outlook for inflation. That hawkish combination was made doubly so by the fact that just four of the 17 FOMC members think the Fed should start tightening after 2014, down from six in January.

Let’s assume that the press and the markets begin interpreting Fed announcements as changes in the expected future path of the fed funds rate.  In that case, haven’t we subtly changed the balance of power at the Fed?  The entire Board of Governors currently favors holding interest rates to exceptionally low levels until 2014.  But most of the 17 potential members of the FOMC do not.  Bankers control 12 of the 17 positions on that “expanded FOMC.”  (Or 12 out of 19 when the Board is fully staffed.)

In addition, votes on the current setting of the fed funds target are public information.  The projections document that Greg Ip links to did not disclose who voted for higher rates in 2014.

A few weeks back I did a post headlined:

House GOP calls for turning macroeconomic policy over to a cabal of unelected bankers, with instructions to ignore the jobless

Now it’s not just a cabal of unelected bankers, it’s a cabal of unelected bankers acting in secret.  If this keeps up much longer I might become one of those anti-Fed conspiracy buffs.


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35 Responses to “An unelected and anonymous cabal of bankers”

  1. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2012 at 07:44

    The Reagan White House nearly skinned Volcker alive back in 1984, and had Treasury Secy Don Regan make public statements that Fed policy should be brought into the White House. Inflation then was just under 5 percent.

    http://news.google.com/newspapers?id=hUBVAAAAIBAJ&sjid=55QDAAAAIBAJ&pg=5524,8412282&hl=en

    The clip above would be regarded as wildly incendiary today, especially if Obama made such commentary.

    Yet, I have begrudging respect for the Reaganauts. They wanted prosperity. They were willing to get ugly to to win.

    Obama seems to think he is governing a tea-and-crumpets afternoon picnic.

  2. Gravatar of John Thacker John Thacker
    27. April 2012 at 07:48

    Benjamin:

    It’s hard to get too upset about Obama’s unwillingness to fight for Fed appointees, considering that his Fed appointees don’t really seem to favor proper policy either. That is no surprise, given that the Administration doesn’t seem to care about monetary policy, focusing on fiscal policy alone.

    It’s not an unwillingness to fight, it’s also that he doesn’t even understand what he needs to fight for. Look at his statements in reply to Christie Romer, as reported in various books. Though in the end the blame also goes to the economic team, if the experts can’t convince the President of the right path.

  3. Gravatar of John Thacker John Thacker
    27. April 2012 at 07:50

    This post by Beckworth is excellent, and note that NY Times reporter Binyamin Applebaum asked a great question about Japan to force Bernanke to actually sort of give an answer.

    That’s the kind of questioning we need. (And an assist goes to Krugman, who can get a NY Times reporter’s attention the way that unfortunately Scott and David can’t.)

  4. Gravatar of dwb dwb
    27. April 2012 at 07:53

    yep, its mostly about accountability: the Fed is defacto inflation targeting with a 2% ceiling. wheres the accountability for the other side of the mandate? By the way DeLong has a post up (which you’ve done dozens of times as well) showing graphically the Fed has not even caught up to the 2% inflation target trend.

  5. Gravatar of ssumner ssumner
    27. April 2012 at 08:09

    Ben, Good point.

    John, I agree that Obama is clueless. He controls the Fed, and hence AD, but just doesn’t know it.

    As far as the question they need to ask Bernanke, see my post from yesterday.

    dwb, That’s right.

  6. Gravatar of Nick Nick
    27. April 2012 at 08:28

    Is it too optimistic to believe that conventional wisdom contained in the second sentence of the statement:

    “FOMC members reduced their forecasts for the unemployment rate, and nudged up the outlook for inflation. That hawkish combination…”

    is incorrect? That is, could it be that the new Fed projections, with (slightly) higher inflation and (slightly) lower unemployment, means that the Fed is going to take the actions necessary to bring about higher inflation and lower unemployment, and therefore the Fed has announced a more dovish policy? Unless they are completely abdicating their responsibility for affecting inflation…

  7. Gravatar of StatsGuy StatsGuy
    27. April 2012 at 08:29

    “If this keeps up much longer I might become one of those anti-Fed conspiracy buffs.”

    Praytell, how long is “much longer”? I’m wondering when I should order you a tinfoil hat, and welcome you to the fold.

  8. Gravatar of Saturos Saturos
    27. April 2012 at 08:51

    *continued from last time*

    [humorless men in suits muscle Ron Paul out of the building]

    Scott Sumner: That’s it! I knew it! The Fed is conspiring to silence all criticism! I know I haven’t exactly encouraged his comments on my blog, but he’s right you know! Capitalism is losing credibility thanks to you and your perverse hard money! And now you’ve dispensed with even the pretense of accountability! I’m done pretending to like you guys! END THE FED! END THE FED! END THE FED!!!

    George Selgin: Mwahahahaha!!! Yesss, it is happening, at lasst. An influential economist has finally endorsed the destruction of the malevolent Fed.

    “Things fall apart; the centre cannot hold;
    Mere anarchy is loosed upon the world,
    And what rough beast, its hour come round at last,
    Slouches towards Bethlehem to be born?”

    That’s right losers, it’s free banking. My time is come at last. Stockholm, book my reservation.

  9. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2012 at 10:30

    John-

    I think we can get upset about Obama’s cluelessness regarding monetary policy, or his lack of resolve, certainly when compared to the Reaganaust.

    It is his job, man.

  10. Gravatar of dwb dwb
    27. April 2012 at 12:01

    aha!

    I think we can conclude, by Bernanke’s statement’s in the past and the actual path of inflation now, that Bernanke has embraced the recession as yet another exercise in opportunitistic disinflation in which the Fed can knock another 40bp off the expected rate of inflation.

    I think we are all Market Monetarists now

    well, almost, but slowly even the meek are accepting the idea that the 2008 recession was opportunistic disinflation.

    http://economistsview.typepad.com/timduy/2012/04/bernankes-shift.html

  11. Gravatar of DonG DonG
    27. April 2012 at 12:05

    Bernanke’s reference to Krugman was amusing. Deflation is horrible, but limit of inflation as it approaches deflation is great.

    If the FED announced that they were going to target a 4% ceiling on unemployment and ignore the pain of inflation, the mattress-stuffers would surely complain. The 2% ceiling for inflation is just as one-sided.

  12. Gravatar of dwb dwb
    27. April 2012 at 12:05

    I did not mean to imply Tim Duy was meek, i just meant ahh well, you know what i meant.

  13. Gravatar of flow5 flow5
    27. April 2012 at 12:18

    The FED should permit the roc in MVt (the proxy for inflation) to spike during the May-June period (as real-output falls). I.e., the FED should target nominal gDp in the next 2 months, rather than adhering to its inflation mandate. The subsequent jump in inflation will be transitory — because the lag for producing inflation (a cummulative figure), is much longer than the lag for producing real-growth. And once support operations for nominal gDp have passed, the FED can tighten (adjust it’s nominal gDp target).

    This year FED policy has been modeled to produce increasing rates of stagflation (business stagnation accompanied by inflation). I.e., nominal gDp’s mix (ratio), between its inflation component (numerator), divided by real-gDp (denominator), will narrow over 2011′s, i.e., (a deceleration in real-gDp & an acceleration in inflation).

    I.e., the average increase in prices for all domestic personal consumption (2.4%), increased at a faster rate than real-output (2.2%) — (stagflation).

  14. Gravatar of Britmouse Britmouse
    27. April 2012 at 14:08

    Mr Cole – nice find on Reagan/Regan. It was simpler for the British Conservatives in the 1980′s, because the government hadn’t outsourced monetary policy to an unelected, unaccountable cabal of bankers, they just ran it themselves:

    http://uneconomical.wordpress.com/2012/04/27/bring-back-nigel-lawson/

    Do we need a return to 1980′s-style macro, with a few tweaks? (And great post, Scott)

  15. Gravatar of W. Peden W. Peden
    27. April 2012 at 15:20

    Britmouse,

    We don’t need it, but it could hardly be worse. 1982-1986 was actually a calm between the storm of the Healey/Howe boom & bust and the Lawson/Lamont boom & bust: NGDP ranged within 1% of 8.5% and there was continuous sustainable expansion of RGDP.

    It’s also an example of what happens to NGDP targeting when the wrong sort of indicators are used: the government focused on M0 and the £-DM exchange rate, leading to a very loose policy that was destabilising for PY and quite dramatically for PT.

  16. Gravatar of Lorenzo from Oz Lorenzo from Oz
    27. April 2012 at 15:30

    Britmouse: I know I am a broken-record on “do it like Oz”, but the RBA operates on an open target agreed between the Governor of the Reserve Bank and the Treasurer. That has accountability and credibility neatly packaged together. (In Australia, we would NOT want a return to 1980s style macro.)

  17. Gravatar of MDrew MDrew
    27. April 2012 at 17:29

    “He [the president] controls the Fed”

    That’s a strong claim.

  18. Gravatar of Bonnie Bonnie
    27. April 2012 at 17:42

    “If this keeps up much longer I might become one of those anti-Fed conspiracy buffs.”

    I think you’d make a very fine one, indeed. Maybe you could get the rest to see it your way and change the rhetoric so the public is angry with the Fed for the right reason. Then, maybe we’d get somewhere.

    There’s more than one way to skin a cat though; it’s hard to believe that none in the cabal have skeletons in the closet and people are pretty sensitive to scandals. If they are playing politics with monetary policy, that makes them fair game. Perhaps there are some journalists out there who aren’t so willing to be Fed apologists like the rest and would be interested in helping to get the place cleaned up.

  19. Gravatar of Saturos Saturos
    27. April 2012 at 23:36

    Lorenzo, we got lucky, our trend NGDP growth was high enough to avoid the ZLB (though you’ve got to give Glenn Stevens credit for being proactive). I can assure you based on the RBA economists I’ve listened to, if we got stuck at the ZLB our central bank would have been every bit as incompetent as the American one.

    On accountability, perhaps out Board is a little too accountable. It is composed of 3 economists, 5 business executives, and 1 Treasury Secretary. It also doesn’t help that our variable-rate mortgages mean there is even more political pressure on the RBA than on the Fed, especially during an election cycle, when it appears to many of our esteemed commentators that the Fed is directly intervening in the chances of the Labor Party, or Liberal Party, or both. In Australia it appears to households as if the RBA’s job is to control the price of housing loans, with inflation only brought up when prompted. The Fed is more isolated that way, people don’t think to judge its performance by anything other than inflation. Of course, that’s precisely the problem over there…

  20. Gravatar of Saturos Saturos
    27. April 2012 at 23:38

    “There’s more than one way to skin a cat though; it’s hard to believe that none in the cabal have skeletons in the closet and people are pretty sensitive to scandals. If they are playing politics with monetary policy, that makes them fair game. Perhaps there are some journalists out there who aren’t so willing to be Fed apologists like the rest and would be interested in helping to get the place cleaned up.”

    Bonnie, I didn’t know you were Lord Voldemort.

  21. Gravatar of Morgan Warstler Morgan Warstler
    28. April 2012 at 01:07

    Scott,

    1. you admit that NGDPLT enables massive cuts to fiscal govt. spending without any negative shocks to the economy.

    The Sumner rally cry is: listen to me and you can crush public employee unions under your boots and the Fed will provide a positive feedback loop.

    2. you complain that conservatives on the Fed are not listening to you, because they want to crush govt. under their boots.

    3. You admit that you have a far better chance of getting #1 under Romney.

    —–

    Now one could argue that you are simply trying to be non-political and champion NGDPLT regardless of who is President.

    BUT, your plan benefits R over D and is more likely from R than D (even Benji admits it).

    So rationally, the moment you become convinced there is a conspiracy, it behooves you to shut up and let the R’s use you and your ideas as they see fit and in their own timely fashion.

    Fair play is not more important than seeing your baby take its turn on the stage is it Scott?

    You are that big a martyr?

    You love mob-rule so much you’ll go all Abraham on your life’s work?

    Nah.

    There’s a exact moment when if you believe Romney is going to win, you will change your approach.

    Keep your powder dry Scott.

  22. Gravatar of Neal Neal
    28. April 2012 at 05:27

    “If this keeps up much longer I might become one of those anti-Fed conspiracy buffs.”

    RON PAUL! GOLD!!

  23. Gravatar of Major_Freedom Major_Freedom
    28. April 2012 at 09:40

    Now it’s not just a cabal of unelected bankers, it’s a cabal of unelected bankers acting in secret. If this keeps up much longer I might become one of those anti-Fed conspiracy buffs.

    They’re already unelected and they’re already acting in secret, and have been since the Fed’s inception.

    The NY Fed secretly (at the time) sent over $40 billion to Iraq to finance the war 2003-2008. They’re almost certainly sending cash to many other places right now as we speak.

    The Fed secretly (at the time) loaned over $16 trillion (cumulative total) to the major banking institutions, that the watered down version of audit the Fed bill was able to uncover, which would never have become known had Ron Paul not been an “anti-Fed conspiracy buff.” Just imagine what a FULL audit would have uncovered up until today.

    The Fed secretly (at the time) financed the Watergate burglars (which has just recently been whitewashed by…the agency under investigation (haha).

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2012 at 09:42

    Only loosely related, Charles Calomiris 2010 testimony to the Financial Crisis Inquiry Commission;

    http://fcic-static.law.stanford.edu/cdn_media/fcic-audio/2010-09-10%20FCIC%20staff%20audiotape%20of%20interview%20with%20Charles%20Calomiris,%20Columbia%20University.mp3

    It’s an hour and forty-five minutes with some of the most fun stuff near the end. He talks about how the public’s anger paralyzed policy making back then (and may still be doing so?).

    Also, related to Scott’s prior post on ‘sectors’ being just that, he calls the data available on the ‘housing wealth effect’ ‘crap’.

  25. Gravatar of ssumner ssumner
    28. April 2012 at 10:43

    Nick, I think they would have announced a new policy in that case.

    Statsguy. The next straw will be the last straw.

    Saturos, Who’s the “influential economist?”

    I still think you need to start your own blog.

    dwb, That was Tim Duy, wasn’t it?

    DonG, Yup, they’re acting as if they have a single mandate.

    Thanks Britmouse, And keep me appraised of your posts–they are always excellent.

    MDrew, He has the power, but has abdicated it by picking people who don’t favor more aggressive stimulus.

    Bonnie, The problem is that not many journalists understand M-policy.

    Morgan, OK, I’ll keep my powder dry.

    Thanks Patrick, But I can’t spend that much time–any transcript?

  26. Gravatar of dwb dwb
    28. April 2012 at 11:13

    yes that was Tim Duy.

  27. Gravatar of Becky Hargrove Becky Hargrove
    28. April 2012 at 12:29

    Saturos,
    Scott’s right. Just do it!

  28. Gravatar of MDrew MDrew
    29. April 2012 at 00:56

    Scott,

    What is your understanding of what the president’s considerations have been in choosing Fed appointees? What should a president’s considerations in so doing be?

  29. Gravatar of MDrew MDrew
    29. April 2012 at 01:06

    Also, is it the case that the president actually has the power to pick without constraint? Even beyond the political hit he takes from members of Congress who fearmonger about inflation any time non-hawks are even floated for monetary policy jobs, is it actually the case that the president can get whoever he wants confirmed and into the positions?

  30. Gravatar of Full Employment Hawk Full Employment Hawk
    29. April 2012 at 09:41

    “If this keeps up much longer I might become one of those anti-Fed conspiracy buffs”

    Or support the Democratic candidates in the Fall election?

  31. Gravatar of Saturos Saturos
    29. April 2012 at 11:37

    “I still think you need to start your own blog.”

    Heck, I’m still trying to get more Twitter followers:
    https://twitter.com/#!/_Srijit

  32. Gravatar of ssumner ssumner
    29. April 2012 at 18:20

    MDrew, If he doesn’t even try, it’s not likely he’ll have much success. In 2009 he didn’t even try (when the Dems had a filibuster proof majority in Congress, he left two seats open for more than a year.)

    In addition, Congress voted a huge stimulus in 2009, so there was certainly plenty of support for stimulus.

    FEH, I generally vote libertarian.

    Saturos, I’m told I should follow Twitter, but I have no time.

  33. Gravatar of MDrew MDrew
    29. April 2012 at 21:14

    This is a complicated matter, and it strikes me that you’re being facile with it to the end of advancing a somewhat absurd line: that the independent agency charged with setting the most powerful instruments of monetary policy (meaning, the people who control the agency’s actions, whoever is or isn’t occupying those seats at any one time). You’re basically bending over backwards to make a political argument about why the Fed is not responsible for making the (in your view) bad policy in precisely. It doesn’t fly. The Fed’s responsibility is to set the right monetary policy. If you have a slam-dunk argument for why the policy they’ve set is wrong, responsibility for that doesn’t skip over them to the president, who has only indirect and constrained control not even over what they do, but over who holds a fraction of the seats on the committee of people who make the decisions. The Fed is charged with getting the policy right; just because some of the members have a track record of being averse to expansionary policy doesn’t get them off the hook if the correct policy would be to pursue it now. That is exactly their responsibility, and it’s not the president’s responsibility to offset their bad votes with thumb-on-scale appointments. If what you have is an economic argument for why current policy is wrong, then it incides upon those who set it, and the president does not. This is a classic case of displacement of responsibility from people you’d like to protect from criticism to someone you’d like to receive it.

    The president deserves criticism for his slackness on appointing. The inflation hawks on the FOMC have agency and responsibility for their part in the Fed’s decisions – more indeed than the president. If what they should be doing is taking extraordinary measures to ease now, then that is what they should be doing. This is exactly what we expect from the Fed whoever is sitting on it: to make correct policy pursuant to the entirety of their mandate.

    The notion that a president should have to make relatively ideologically extreme appointments to offset the votes of members whose votes we simply assume to be wrong fundamentally displaces responsibility for the function that we expect the agency to perform – which is exactly what we seek to avoid by emphasizing the agency’s independence. We must hold the Fed responsible to make the correct policy decisions at all times, assuming that the president can make neutral appointments and that the Fed will still perform that function. Otherwise we promote imbalance and political dependence in the institution, which by definition pulls it away from decision making based on economic evidence and argument.

  34. Gravatar of MDrew MDrew
    29. April 2012 at 21:22

    Sorry -

    a somewhat absurd line: that the actions of the independent agency charged with setting the most powerful instruments of monetary policy is fully controlled by the person who merely nominates a minority of those who sit on its decision making body, facing all the political and institutional constraints that attend other high-profile presidential appointments – AND that therefore responsibility for the actions of this independent agency takes in the course of setting those policies (independently given any particular personnel makeup) ultimately lie with this constrained person on the outside.

  35. Gravatar of ssumner ssumner
    4. May 2012 at 16:04

    Mdrew, If Obama expected the Fed to do its job then why in the world would he have proposed fiscal stimulus?

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