Kocherlakota on Fed policy

Cloud Yip recently interviewed Narayana Kocherlakota:

Q: In the same paper, you have also suggested that in the reform of the Fed structure, we should strip New York Fed of its vote of FOMC. Can you walk us through your reasoning?

K: That’s more about the effectiveness of the monetary policy. The role of the non-New York Presidents is very clear in the process. They are the disruptive force of the groupthink that you would otherwise get in the Washington-based entity. We have just talked about there were only two dissents in the last 20 years out of the Board of Governors. That’s groupthink in work. The non-New York Presidents played a very valuable role on that dimension. Plus, they are very important in communicating with their own districts. So, I think non-New York regional Feds provided the two-way communication role and the independent thinking. They are very essential.

The New York Fed doesn’t play these roles. The New York Fed’s functions are mainly about gathering information among the financial markets and performing the Fed’s market functions. These are all important things. But their stuff works very closely with the Washington staff. There is really no way that the New York President can be independent of the Washington groupthink.

Also, though there are certainly some two-way communications that the New York President does, there is only a limited amount of that. But most of what New York is doing is on the information gathering in Wall Street and implementation of Fed’s policy in Wall Street.

On the flip side, given the closeness of the New York Fed and the Wall Street, having the New York Fed President votes in the FOMC really creates some misperceptions about Fed’s monetary policy. So, I just don’t think you get much benefit from having the New York Fed President votes. They are very close to the Wall Street, and they are actually located right in the Wall Street. It looks like Wall Street has a lot of say over monetary policy. I just don’t think the pluses outweighs the negatives.

Those are good points.  Peter Conti-Brown points out that one objection to Fed presidents voting is that this means important government policy is set by people who are not government employees.  This creates the impression that the Fed caters to the banking industry (and it’s probably not even constitutional).  One solution is to continue having Fed presidents vote, but make them government appointees picked by the President and confirmed by Congress.

This also caught my eye:

In a section of his book “The Courage to Act”, Ben Bernanke wrote about how three governors, Powell, Stein, and Duke, were the main influences behind initiations of the tapering in 2013. All that took place behind the scenes. The public has no idea of that was going on. I just don’t think that is a good way to make policies. Fed Independence does not mean opaqueness. The only way for the independence to survive is for the Fed to be transparent about how it makes the decisions that it is making.

Two of those hawks were Obama appointees.  This is why I think people obsess way too much about who Trump might appoint to the Fed.  It makes much less difference than you might imagine.  Imagine back in 2009 speculating who Obama might pick—would you expect it to be a couple of hawks who advocated tighter money in the midst of the weakest recovery in American history?



13 Responses to “Kocherlakota on Fed policy”

  1. Gravatar of Cloud Yip Cloud Yip
    31. March 2017 at 06:15

    Thank you so much Prof. Sumner!

  2. Gravatar of bill bill
    31. March 2017 at 06:55

    Sadly, if you asked Obama about this now, I think he’d still say, “what are you talking about? Interest rates were still at zero so policy was very loose”. And I think he’d say that because that was the message from Summers and Krugman. Sure, PK would always caveat his writings with “QE can’t hurt” and “promise to be irresponsible” etc, but those were whispers while the shouting was “Do fiscal stimulus” and “Build infrastructure/Shovel ready projects”. These are just my conjectures.

  3. Gravatar of Ray Lopez Ray Lopez
    31. March 2017 at 08:13

    This post by Sumner needs background, and thus is poorly written. The implication is that only the NY Fed currently votes, without Googling it, which seems odd, and in any event contradicts the narrative behind “Lords of Finance” by Liaquat Ahamed, where the NY Fed almost saved the day. Thankfully, none of this high-school style drama matters, as money is largely neutral short term and long.

  4. Gravatar of Christian List Christian List
    31. March 2017 at 12:33

    Don’t forget the alien invasion.

  5. Gravatar of ssumner ssumner
    31. March 2017 at 18:26

    Cloud, Keep up the good work.

    Bill, That may be true.

  6. Gravatar of Benjamin Cole Benjamin Cole
    31. March 2017 at 18:42

    Kocherlakota deserves kudos for thinking rather than merely accepting, but on another level he sounds like an absorbed man suggesting improvements in Borg operations.

    (Yes, Star Trek allusion).

    Ronald Reagan (reverent hush, please) was a man never absorbed by the glories of the Federal Reserve, or even much by the hallowed prerogatives of modern-day central banking.

    President Ronald Reagan said, “Shove the Fed into the Treasury Department and have it report to me.”


    The long view?

    Reagan was right.

    The Fed is not accountable, not transparent, cloistered, self-reverent, industry-captured—-everything an independent public agency will become, over the decades.

    Only the marketplace keeps private-sector companies efficient and serving the public.

    The political marketplace places some constraints on agencies answerable to the public.

    Independent public agencies….well, they march to a different drummer….

  7. Gravatar of flow5 flow5
    1. April 2017 at 04:45

    The Fed has its own Romulan cloaking device.

    Pre-Oct 6 2008 (before the Obama administration censored the Fed’s 300 Ph.Ds.: “The Federal Reserve Plans To Identify “Key Bloggers” And Monitor Billions Of Conversations About The Fed On Facebook, Twitter, Forums And Blogs”)

    The FOMC decision-making processes (supervision and regulation) should lie entirely with the Board of Governors, and that the Board should be reconstituted to include the Secretary of the Treasury, the Comptroller of the Currency, the Chairman of the Federal Home Loan Bank Board, the Director of the Federal Deposit Insurance Corporation, and the Chairman of the Securities and Exchange Commission.

  8. Gravatar of Negation of Ideology Negation of Ideology
    1. April 2017 at 14:01

    Ray – The FOMC consists of the 7 members of the Board of Governors, the NY Fed President, plus four of the other eleven Fed Regional Bank Presidents on a rotating system. The article is referring to removing the permanent vote of the NY Fed.

    Liaquat Ahamed’s “Lords of Finance” covered the period of the 1920s, before the FOMC was created in 1933, and voting structure was set in 1935, so your comment is irrelevant.

    It is not the responsibility of every blog author or interviewer to review the basic facts of an institution every time they comment on that institution. A certain amount of knowledge can be assumed.

  9. Gravatar of Negation of Ideology Negation of Ideology
    1. April 2017 at 14:23

    Benjamin –

    I take a back seat to no one in respect for Ronald Reagan, but I don’t get how the Fed is not accountable. Congress created the Fed, and it could eliminate it tomorrow by a simple majority vote of both Houses (or 2/3 if the Pres vetoes it). The Fed is accountable to Congress. Congress can also issue US Notes any time it wants.

    I favor changes to the Fed charter, namely taking away the bank appointed seats at the regional banks, but the proposal you suggest would increase the power of an already too powerful Presidency and decrease deliberation in favor of Populism.

  10. Gravatar of Benjamin Cole Benjamin Cole
    1. April 2017 at 16:15

    Negation of Ideology: The Great One consulted the correct astrologers when he proposed revamp of central banking.

    When does democracy devolve into “populism”?

    When “populism” tramps on rights, yes that is a problem.

    When a monetary policy is “populist” or democratic…what is wrong with that?

    The Fed in theory is accountable, perhaps. But it is structured as an independent agency, and as a practical matter aligned with the lobby-rich financial industry.

    Congress actually has a law on the books, Humphrey-Hawkins, mandating 4% unemployment. The Fed has no problem in keeping 5% unemployed even when it is below its inflation target.

    Now, if the Fed chief could be summarily fired by a president…

  11. Gravatar of flow5 flow5
    2. April 2017 at 11:39

    Most people don’t even know about politics. The Fed is a slave to the “big boys”.

  12. Gravatar of Plucky Plucky
    5. April 2017 at 09:55

    On the matter of constitutionality, it’s important to distinguish the roles of the FOMC from the Board of Governors. As a practical matter they are nearly indistinguishable, but all of the regulatory functions are assigned to BoG (which of course consists only of Senate-confirmed appointees), with the FOMC only making decisions over the system’s balance sheet size & composition. The latter function, while obviously of immense importance, is not really “government policy” in the constitutional sense. Having non-governmental people doing this was not considered unconstitutional when it was done the first or second Bank of the United States.

    The Fed does inhabit a very odd place constitutionally, and there should probably be some structural reform to more clearly delineate (or separate) regulatory and monetary roles, but as odd as it is, the current arrangement is constitutional

  13. Gravatar of ssumner ssumner
    5. April 2017 at 17:15

    Plucky, You said:

    “The latter function, while obviously of immense importance, is not really “government policy” in the constitutional sense. ”

    Monetary policy is obviously government policy, it’s just silly to suggest otherwise. Congress even gave the Fed its dual mandate.

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