Monetary Economists as Policymakers at the Federal Reserve

Several articles in recent years have claimed that more diversity in the sense of fewer economists on the Board of Governors and the Federal Open Market Committee (FOMC) would be a good thing (Fox “How Economics PhDs took over the federal reserve”; Zumbrum “Fed draws on academia, Goldman for recent appointees”; Calabria “Yes Fed has a diversity problem”; Ricketts “The Fed could use less book learning and more street smarts”). This is of some importance. There currently are three vacancies out of seven positions on the Board. One will be filled by the Vice Chairman for Bank Supervision. Several of the twelve bank presidents have turned over in the last few years and more may well turn over in the next few years.

This clamor seems to having an effect or at least reflects an opinion held by Reserve Banks’ boards of directors. The number of Ph.D. economists heading Federal Reserve Banks has fallen in recent years. Three presidents who were professional monetary economists and took strong stands have left, Naryana Kocherlakota, Charles Plosser and Jeffrey Lacker. The first two have been replaced by non-economists and the latter may well be also.

Positions at the Board are different than Reserve Bank presidents. Some positions at the Board are allocated to community bankers or bank supervision (Calabria 2016). The number of professional monetary economists who are community bankers is small and there is no reason to think that such a community banker would know more about monetary policy than other community bankers. The most important qualifications of the Vice Chairman for Bank Supervision concern knowledge about regulation (Davidson and Tracy 2017). There are qualifications for Board members based on geographic distribution that should be taken seriously (Calabria 2016).

These assorted criteria do not apply to Reserve Bank presidents. Furthermore, the operational work at Reserve Banks of clearing checks has disappeared and Reserve Bank’s most important roles concern monetary policy and supervision and regulation. Supervision and regulation at Reserve Banks is a Board function delegated by the Board to Reserve Banks. In the end, the Board is in charge of supervision and regulation.

If there is a reason to have Reserve Banks, monetary policy is it. Reserve Bank presidents have their own economics staff to brief them, a luxury that members of the Board of Governors do not have. Some of the Reserve Bank presidents who are economists have been quite effective at raising issues about monetary policy such as the desirability of the Federal Reserve’s holdings of mortage-backed securities.

Nonetheless, some think monetary policy would be better if fewer Presidents of Reserve Banks were economists. Would it?

There are two aspects of being a policymaker at the FOMC. Monetary economists have some expertise at one and substantial expertise concerning the other.

The FOMC sets the specific goals of monetary policy. The general goals are set by law but the specific goals in terms of inflation and real economic activity are determined by the FOMC. (I think it would be better if specific goals were set by Congress and the Administration but they are not.) Monetary economists have some expertise at determining the goals because they have thought about them more than most people, but staff assisting presidents provide this knowledge to some extent.

The FOMC’s other task is to use monetary policy tools to produce the goals. Whether or not members of the FOMC are economists, economists brief presidents of Federal Reserve Banks before FOMC meetings and monetary economists have particular expertise concerning these issues.

It takes serious economic analysis to understand how monetary policy worked even before the financial crisis. That is more true today.

There is not a consensus among monetary economists about how monetary policy works in the context of current policies such as interest on excess reserves and Quantitative Easing. (Or for that matter, even what the effects of Quantitative Easing are.) A Principles of Economics course is not sufficient to have the economics background to reach an informed judgement about how monetary policy works today and why alternatives are in error. An undergraduate economics degree twenty or thirty years ago is of no more use.

While it is possible for an economic advisor to teach a non-economist enough to understand the issues, it is difficult to imagine a policymaker ignoring the judgement of the economists who brief him or her. Some non-economists have been involved enough in monetary policy issues to have strong opinions before they are appointed. (Quarles is an example of someone who is being considered and has at least one strong opinion about monetary policy (Davidson and Tracy 2017).) Many if not almost all have not.

Economic advisors provide informed analyses and the FOMC meetings are informed discussion of the economy and monetary economics. Some policymakers are comfortable with briefings that reflect different opinions. Some are not. The judgements of the economists providing the briefing will play an important role in the choices made by a president, whether there is one point of view or more than one.

The economists briefing the President will play a far larger role if a President is not a monetary economist. The policymaker’s policy preferences might be different than the staff’s preferences on occasion but even these differences are unlikely to be important.

The argument is to appoint more presidents at Federal Reserve Banks who have no expertise in monetary economics and will be on the FOMC. Such appointments are unlikely to increase the level of discourse or the soundness of decisions at the FOMC. If such appointments have any effect, they most likely will enhance the importance of views held by the Reserve Banks’ economics staffs.

REFERENCES

Calabria, Mark. 2016. “Yes, the Fed Has a Diversity Problem.” Cato at Liberty. June 23, at https://www.cato.org/blog/yes-federal-reserve-has-diversity-problem.

Davidson, Kate, and Ryan Tracy. 2017. “Expected Fed Pick on Collision Course with Current Members on Rates.” Wall Street Journal, April 17, at https://www.wsj.com/articles/expected-fed-pick-on-collision-course-with-current-members-on-rates-1492469900.

Fox, Justin. 2014. “How Economics Ph.D.s Took Over the Federal Reserve.” Harvard Business Review, February 3, at https://hbr.org/2014/02/how-economics-phds-took-over-the-federal-reserve.

Ricketts, Joe. 2017. “The Fed Could Use Less Book Learning and More Street Smarts.” Wall Street Journal. April 10, at https://www.wsj.com/articles/the-fed-could-use-less-book-learning-and-more-street-smarts-1491864871.

Zumbrun, Josh. 2015. “Fed Draws on Academia, Goldman for Recent Appointees.” Wall Street Journal, November 10, at https://www.wsj.com/articles/fed-draws-on-academia-goldman-for-recent-appointees-1447177296.

Leave a Reply