Friday, July 26, 2013

Who Should Run the Fed?

It seemed like a foregone conclusion that Janet Yellen would be the next Chairman of the Board of Governors (and hopefully would get the powers-that-be to drop the "man"), when Bernanke's term ends on January 31. But apparently some people have other ideas. As today's NYT notes, Larry Summers is being taken seriously as a contender for the job.

If we stick to economic ideas, Yellen and Summers are quite similar. Both are Old Keynesians - they're aware of mainstream macroeconomics, but seem most comfortable with an IS-LM, Phillips-curve view of the world. But if we look at what they have written and said in public, some differences emerge. For example, in this speech by Janet Yellen in April, on "Communication in Monetary Policy," she explains how communication policy has evolved at the Fed, and defends current policy. She thinks that quantitative easing (QE) works as intended:
These [large-scale asset] purchases were intended to, and I believe have, succeeded in significantly lowering longer-term interest rates and raising asset prices to help further the Federal Reserve's economic objectives. This is an easing of monetary policy, also known as accommodation, beyond what is provided by maintaining the federal funds rate close to zero.
Also, the adoption of thresholds for monetary policy actions was a good idea:
I consider these thresholds for possible action a major improvement in forward guidance. They provide much more information than before about the conditions that are likely to prevail when the FOMC decides to raise the federal funds rate. As for the date at which tightening of monetary policy is likely to occur, market participants, armed with this new information about the Committee's "reaction function," can form their own judgment and alter their expectations on timing as new information accrues over time.

These thresholds will, as a consequence, allow private-sector expectations of the federal funds rate to fulfill an important "automatic stabilizer" function for the economy. If the recovery is stronger than expected, the public should anticipate that one or both of the threshold values will be crossed sooner and, hence, that the federal funds rate could be raised earlier. Conversely, if the outlook for the economy unexpectedly worsens, the public should expect a later "liftoff" in rates--an expectation that would reduce longer-term interest rates and thereby provide more-accommodative financial conditions.
Yellen supports the status quo on the FOMC, and there is no reason to think that she would be much different from Bernanke as Fed Chair.

Summers, on the other hand, is quoted in this FT article as being dubious about QE:
QE in my view is less efficacious for the real economy than most people suppose.
If QE won’t have a large effect on demand, it will not have a large effect on inflation either.
So, on this, Summers and I agree, more or less. If QE matters, it's not for the reasons the Fed thinks, and the consequences may not be what the Fed thinks they are, either. But QE is not inherently harmful, or inflationary. Harm can only come if the Fed has beliefs about QE that are not correct, or if QE somehow causes political trouble for the Fed.

Summers also says (from the same FT article):
If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal. We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favour of suggesting that we should normalise interest rates.
That appears to run counter to current Fed forward guidance thresholds. The FOMC consensus appears to be that 5.5% unemployment is normal.

So, Yellen would give us continuity, but Summers might shake things up a bit, perhaps in a good way. But sometimes Summers gets in trouble when he shakes things up. At the World Bank, there was the infamous Summers memo, and he didn't exactly make a lot of friends among female scientists as Harvard President. As economists we might understand better than the average person what Summers was trying to say when he opened his mouth and put his foot in it, but central bankers do well when they have the right filters between brain and mouth.

An important point is that Yellen will not need to go through Senate confirmation to become Chair of the Board of Governors. She was already confirmed to be a Governor, for a 14-year term, in October 2010. The Chair is chosen from among the Governors. In cases where the proposed Chair is not already a Governor, the Senate must go through confirmation proceedings.* Possibly that won't a cakewalk for Summers, and President Obama should be worried about that, if he isn't already. In addition to offending people in developing countries, women scientists, and various faculty members at Harvard, some people have objected to Summers' perceived role in the Shleifer affair, and this may have had something to do with his resignation as President of Harvard. I have no opinion on this, as I don't know anything about it, but obviously some people think they know things, and they have strong opinions. And Summers has to carry that baggage into confirmation proceedings.

But, enough about Yellen and Summers. If you were to ask me (not that anyone is), I would advise following the lead of the Bank of England. Appoint a Canadian! As everyone knows, Canadians have superior leadership abilities, are excellent economists, and understand financial stability really well. But which Canadian? Tiff Macklem, current Senior Deputy Governor of the Bank of Canada, would be great. The fact that he's not a U.S. citizen could put the kabosh on that idea, but maybe he's a secret American - his mother took a trip to Plattsburgh to give birth, or some such.

*See the comment below.


  1. Very funny your proposal, Stephen.
    But it seems that Macklem has a PhD from Western Ontario... isn't that Old Keynesian as well? Oh no, wait, this is David Laidler fiefdom, then perhaps, Old Monetarism? :-)

    1. I was hoping you would ask. Tiff was a Jeremy Greenwood student. So he is a serious modern macroeconomist. In the 1985-86 academic year I taught an advanced PhD money course at Western Ontario, which Tiff took for credit. I taught money and banking theory, so Tiff would have learned what I was doing at the time - OG models, Diamond-Dybvig, some research I was doing on intermediation. What we would now call credit frictions. So he is also a new monetarist, if he was paying attention.

  2. Ahem, I know a Canadian who is a U.S. citizen and happens to be a monetary economist (unlike Summers and Yellen). I think he teaches somewhere in St. Louis. :)

    1. Yes, but in spite of my consistent support for Barack, he doesn't write, he doesn't call...

  3. CA, but do remember that it was that Canadian who is a US citizen who is a monetary economist who teaches in St. Louis, who said (of Kocherlakota, if I recall correctly) that nerds should not become policy makers...
    BTW, feeling a bit left out, Stephen?

  4. Well, a Canadian will get confirmed by Republicans, right.

    1. If it was my brother, Republicans would like him.

  5. "An important point is that Yellen will not need to go through Senate confirmation to become Chair of the Board of Governors. She was already confirmed to be a Governor, for a 14-year term, in October 2010. The Chair is chosen from among the Governors. In cases where the proposed Chair is not already a Governor, the Senate must go through confirmation proceedings."

    This is incorrect. Yellen would still have to be confirmed by the Senate.

    Recall that Greenspan completed his first full term as a Governor between 1992 and 2006 and had to be renominated for Chair by the President and confirmed by the Senate in 1996, 2000 and 2004. Similarly, although Bernanke's 14 year term as Governor does not end until January 31, 2020, he had to be renominated for Chair by the President and confirmed by the Senate before his second term as Chair could begin on January 31, 2010.

    1. Yes. My colleague Kim Schoenholtz adds:

      From the Federal Reserve Act Section 10 part 2:

      Of the persons thus appointed, 1 shall be designated by the President,
      by and with the advice and consent of the Senate, to serve as Chairman
      of the Board for a term of 4 years....

    2. Thanks. The question then is, who gets an easier time in the Senate, Yellen or Summers?