Tyler Cowen on Fed nominees.

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.

Backed Off

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”.



19 Responses to “Tyler Cowen on Fed nominees.”

  1. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2019 at 16:27

    In July 2017, Randal Quarles was nominated by President Donald Trump to be board member and vice chair for supervision of the Federal Reserve. He was confirmed by the United States Senate on October 5, 2017,[4] by a 65–32 vote on the board seat and by voice vote on the vice chair position. The bank supervision position had been created under the 2010 Dodd-Frank financial law but had never before 2017 been filled.[5] In 2012, Quarles was widely mentioned as a possible Treasury Secretary or senior White House adviser in future Republican administrations.[6]


    I guess the Federal Reserve has tried to answer this problem of both supervisorial and monetary policy obligations by creating this vice chair position.

  2. Gravatar of Rajat Rajat
    27. April 2019 at 16:58

    I have 3 questions/comments:

    1. Do you really think Bernanke and Yellen are only ‘slightly better’ monetary policy experts than Larry Summers? I watched this presentation at the Peterson Institute and was underwhelmed. https://www.youtube.com/watch?v=9SDvexw9Dp4
    It essentially sounds like he is supporting old Keynesian policy, which he tries (with questionable success in my view) to distinguish from the MMT he criticises. He also consistently conflates real and nominal secular stagnation. For example, real secular stagnation doesn’t imply persistent unemployment as in the 1930s.

    2. The Governor of the Australian RBA is an MIT PhD-trained economist. In 2002 he wrote a paper with Claudio Borio on how monetary policy should focus less on goods price inflation and more on asset prices https://www.bis.org/publ/work114.htm Australian core CPI recently printed at 1.3% y/y, and has undershoot the 2-3% target for several years now, and the RBA has not reduced interest rates below the current 1.5% level for nearly 3 years (since Lowe was appointed). It occurs to me that we would do better with a less well-trained everyman Governor like Jerome Powell than someone with all the credentials but whose (impeccable) training has potentially led them to be over-zealous in pursuit of their academic ideas.

    3. What do you think of Ramesh Ponnuru for the Fed?

  3. Gravatar of Michael Sandifer Michael Sandifer
    27. April 2019 at 19:22

    The older I get, the more I agree with Friedman. Monetary policy should be set by computer. Either have a computer maintain an NGDP level-target using your NGDP futures idea, or have electronic payments that reflect NGDP reported daily with the computer making daily adjustments to do the same thing.

    That said, you underestimate yourself Scott. I’d be fine with you on the FOMC.

  4. Gravatar of Pyrmonter Pyrmonter
    27. April 2019 at 21:08

    Was Cain such a bad nominee? He’d spent time on the board of one of the regional Feds. Moore strikes me as the less suitable of the pair.

  5. Gravatar of dtoh dtoh
    28. April 2019 at 02:58


    1. I totally agree with Michael Sandifer. Create an iPhone app to replace the FOMC. Program it with a machine learning algorithm and feed it real time econ data that correlates with NGDP. Then fire all the economists working for the Fed.

    2. I’ve presided over at least 100 Board meeting and probably twice that number of committee meetings. Tyler Cowen totally does NOT understand governance. (His post reads like a adolescent junior high essay.) For starters, boards are not supposed to manage.

    3. How do you explain the fact that Bernanke ranks in the top five greatest destroyers of utility in the last century.

  6. Gravatar of rayward rayward
    28. April 2019 at 07:31

    The consensus among economists is that the Fed should not use contractionary monetary policy to deal with asset bubbles. Contractionary monetary policy is used to deal with “inflation”, and asset bubbles are not “inflation”. Inflation occurs when demand outpaces supply, or when consumers believe consumer prices tomorrow will be higher than consumer prices today and increase consumption today in response. In any case, rising asset prices gets a pass; indeed, rising asset prices increases wealth and wealth reflects economic growth and prosperity. What sane person would oppose rising asset prices and prosperity? Trump is judged by whether asset prices are rising or falling, and Cain and Moore, the two candidates he has considered for appointment to the Fed, prefer rising asset prices to falling asset prices. Does Sumner prefer rising or falling asset prices, prosperity or misfortune? Or are the accepted meanings of inflation and prosperity among economists not kept pace with the changes in the economy that have occurred in the past 30-40 years?

  7. Gravatar of ssumner ssumner
    28. April 2019 at 08:33

    Rajat, While you can certainly find exceptions, on average we are better off with highly qualified Fed officials rather than less qualified officials. You mentioned Powell, who has done a fine job. But during the Yellen period his views were more hawkish than Yellen’s, and that has not held up well.

    Ponnuru would be far better than the recent choices by Trump.

    Pyrmonter, Being on the Board doesn’t mean anything. He has zero experience on monetary policy, which is the Fed’s most important task. But his biggest problem is not experience, it’s his views on monetary policy–he seems to favor a procyclical policy.

    dtoh, You said:

    “How do you explain the fact that Bernanke ranks in the top five greatest destroyers of utility in the last century.”

    By denying that it is true. Hilter, Stalin, Mao, Pol Pot, Lenin. There’s 5 right there. I see Bernanke as a net plus for the world.

    Rayward, You said:

    “Cain and Moore, the two candidates he has considered for appointment to the Fed, prefer rising asset prices to falling asset prices.”

    Your attempts at humor fall flat.

  8. Gravatar of Sunday assorted links – Marginal REVOLUTION Sunday assorted links - Marginal REVOLUTION
    28. April 2019 at 09:39

    […] 2. Scott Sumner on who should be nominated to the Fed. […]

  9. Gravatar of dtoh dtoh
    28. April 2019 at 10:40

    I agree with your first three, but I had Bernanke ahead of Pol Pot and Lenin on my list.

  10. Gravatar of Per Kurowski Per Kurowski
    28. April 2019 at 10:46

    That Bank of England has “a committee composed entirely of experts on monetary policy, and another committee of experts on bank regulation” been useful? I don’t think so as the mistaken bank regulations that helped cause the 2007-08 crisis are still well and alive.

    “Personal integrity” includes, in the front row, being able to acknowledge the mistakes and how many have you heard say “Us thinking that what was perceived as risky was more dangerous to our bank systems than what was perceived as safe” was clearly totally wrong.

  11. Gravatar of Jeff Jeff
    28. April 2019 at 15:47

    It would be better to turn bank supervision over to the FDIC. They’re the ones with skin in the game.

  12. Gravatar of Timothy Hopper Timothy Hopper
    29. April 2019 at 01:54

    “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.”
    This had the obvious effect of making me try to think of a plausible structure which would make Scott a good candidate. I think he would fit well into a Fed where:
    The Board was only responsible for monetary policy.
    The Board was split into:
    A high end policy Board, which decided the type of monetary regime (Inflation rate targeting or NGDP level targeting, etc.) which met occasionally/when required and communicated mainly in writing). Board could include Scott Sumner;
    An implementation team which based in NYC which met daily and determined the changes in the relevant instrument (e.g. interest rate target).

  13. Gravatar of ssumner ssumner
    29. April 2019 at 08:14

    Per, I can’t speak the bank regulation in the UK, but overall the BoE has been one of the better run central banks in recent years. Compare it to the ECB or the BOJ. Having experts make decisions is no guarantee of success, but it beats the alternative.

    I should add that I prefer a completely deregulated banking system. But as long as we have regs promoting moral hazard, we need more regs discouraging risk taking.

    Jeff, That might be better.

    Timothy, Ideally I could work out of my home in Orange County, emailing my vote on the fed funds target once a day.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. April 2019 at 08:26

    Though, as I said a week or so ago, I’d rather have Cain than Moore, Jeremy Siegel and I seem to be on the same page;


    I am not a fan of a gold or even a strict commodity standard, but analyzing sensitive commodity markets’ price signals should be an important input for monetary policy. I concur with Mr. Moore that had the Fed paid attention to such prices (and other financial indicators such as equity prices and yield spreads) last December, they might not have raised the fed-funds rate and certainly would not have given the ill-advised hawkish rate outlook that tanked the stock market.

    As for Mr. Moore’s earlier warnings that former Fed Chairman Ben Bernanke’s quantitative easing would lead to rapid inflation, recall that some well-respected monetary economists echoed them.

    I’ve been supportive of Fed policy since the financial crisis. But any organization, even a great one, can easily fall victim to groupthink. The Fed governors have taken more than 100 official votes on monetary policy over the past 15 years. There have been 649 affirmative votes for the chairman’s policy and only a single lone dissent.

    Mr. Moore’s appointment will not itself revolutionize policy-making at the Fed. He will be only one of 12 voting members of the Federal Open Market Committee who, along with seven regional Fed presidents, deliberate on monetary policy. But his presence would serve to remind Fed governors that there are many ways to interpret economic data. The hallowed corridors of our central bank deserve a breath of fresh air.

  15. Gravatar of John John
    29. April 2019 at 10:13

    The DC fed is NOT a big organization. Until TC mentioned it in his post, I’d never even heard anyone suggest something like this. The fact is that the managerial and administrative tasks are all carried out at the regional banks.

    The Board of Governors employs 2,847 people (compare to 19,822 at the regional banks) and accounts for 13% of the system’s budget. It’s a small organization (and even the BoG itself has separate managers, the members of board are not getting involved in day-to-day management).

    I have no problem with the idea of setting up separate monetary policy and regulatory committees, but aside from that just how much more decentralized could the Fed get? Given the unique public-private character and the substantial independence of the regional banks governed by their own boards, I can’t think of any US example that’s more decentralized than the Fed.

    What exactly are these management tasks being foisted on the chair that Bernanke and Yellen are supposedly incapable of handling?

  16. Gravatar of ssumner ssumner
    29. April 2019 at 14:35

    Patrick, Are you saying that Moore would have opposed QE back then if Trump were president?

    John, I’d hate to manage an organization of 5 people, much less 2847.

    I don’t think Bernanke and Yellen were as effective at getting others to support them as a Larry Summers might have been. On the other hand, Summers might have pressured people into supporting policies that were inferior to what Bernanke advocated. So it’s unclear who would have been better.

  17. Gravatar of Matthias Görgens Matthias Görgens
    30. April 2019 at 16:52

    Michael Sandifer, with a deregulated banking system like Scoot suggests you don’t even need a computer to do monetary policy. You don’t need (much) monetary policy at all.

    Just freezing the monetary base and abolishing the Fed monopoly on cash would likely be enough to create an elastic money supply.

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. April 2019 at 19:51

    ‘Patrick, Are you saying that Moore would have opposed QE back then if Trump were president?’

    How would I, or Jeremy Siegel, know?

  19. Gravatar of All eyes on the Fed | Bruegel All eyes on the Fed | Bruegel
    6. May 2019 at 02:29

    […] Sumner from The Money Illusion weighs in and adds personal integrity to the list, but also vouches for a more decentralised Fed. […]

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