Sunday, November 5, 2017


Will Jay Powell do a good job of running the Board of Governors and the FOMC? He's certainly not an obvious choice. If Powell had not been appointed to the Board in 2011, nobody would be thinking of him as a candidate for the Chair's job now. Powell is a lawyer, with no formal training in economics (beyond the odd undergrad course), which puts him at a disadvantage in the Fed system. On the up side, he has a willingness to learn:
“When he showed up at the Fed, he basically did not know much about macroeconomics or monetary policy,” says Seth Carpenter, chief U.S. economist at UBS who spent 15 years at the Fed, including time overlapping with Powell. “He made a conscious decision to spend a lot of time with staff and colleagues to learn as deeply and completely as possible.”
So, Powell appears to be conscientious in seeking advice about things he doesn't know much about. But, the Board may actually not be a great place to learn macroeconomics - the Board staff aren't known for their independent thinking, for example. Further, a Board Governor is not in the best position to learn, as he or she does not have a staff, and is dependent on more-or-less randomly assigned economists to get their work done. Indeed, a Governor's job is thankless in more ways than one. He or she currently earns $179,700 per year, which is less than what a good Associate Professor in Economics is paid at a top research school. And the Presidents of the regional Feds are much better remunerated. Dudley (New York Fed) earns $469,500, Williams (San Francisco Fed) earns $468,600, and Bullard (St. Louis Fed) earns $359,100, for example.

But any of those salaries pale in comparison to what Powell had to be earning in the private sector, judging from his accumulated wealth, which appears to be between $20 million and $55 million. So, to his credit, we can infer that Powell is genuinely interested in public service, otherwise he would still be in the private sector, further feathering his own nest. At six years in, he has been at the job longer than is typical for Board Governors, who are appointed for 14 years, but rarely serve the full term, or anything close.

What are Powell's views on monetary policy? He certainly has not been outspoken about it. Brainard and Tarullo have had differences with the consensus view on the FOMC, and weren't shy about talking about it. Stan Fischer, given his long experience as an academic economist and central banker, certainly had a lot to say, and clearly had his own views on policy. Powell, not so much. A quick look through some of Powell's speeches indicates that he typically did not speak specifically on monetary policy. When he did, for example in a 2016 speech, it's boilerplate - basically the consensus FOMC view. I've seen Powell in action only once. I know he said something, but I can't remember what it was. You might say my memory isn't so great, but from the same occasion, I can remember key details of what Kocherlakota, Evans, Brainard, Lacker, Fischer, and Yellen were talking about. Powell, in the general view, is collegial, reasonable, and intelligent. But in instances where we need depth of experience in central banking and knowledge of economics, he'll have to be looking to other people. That's worrisome.

So why was Powell chosen? Some have suggested that, relative to Yellen, Powell leans more toward less financial regulation. That's too deep for Trump, though, I think. Most official high-level Trump appointments are of three types: (i) person bent on destroying the institution he or she is assigned to run; (ii) General - either active or retired; (iii) rich white male. Powell is type (iii). Just be thankful he isn't type (i) or (ii).

But why didn't Trump just stick with Janet Yellen? After all, he claimed he liked her, right? Well, Yellen is neither male nor rich, so she has two strikes against her, in Trump's mind. Further, Trump seems convinced that people he appoints owe him favors. In Trumpland, an Obama appointee just can't have the right predilections.

But is Yellen a great loss? The New York Times editorial board thinks so. Adam Davidson, in the New Yorker, says that Janet Yellen is a "master of thinking in public." Jena McGregor, in the Washington Post, collects a lot of favorable quotes relating to Yellen's record as Fed Chair, and remarks on the loss of a woman in a position of power, where there currently are few.

From my point of view, Yellen was successful in forging consensus on the FOMC. Apparently, she didn't force her views on others (unlike Greenspan, for example), and the FOMC seems to have operated in a collegial fashion for the last four years. There were some dissents, but given the context there really wasn't that much friction. After all, the Fed was dealing with a unique situation - the large balance sheet that had been built up under Bernanke, and an unprecedentedly long period of essentially-zero overnight nominal interest rates. Deciding when and how to unwind that was no easy task. That said, Yellen's training (PhD 1971) put her out of touch with modern macroeconomics, and she appeared to have a religious devotion to the Phillips curve. With respect to the latter, she has plenty of company in the rest of the central banking community, but that's no excuse. As well, Yellen is well-known for her reluctance to appear in public - Adam Davidson's characterization of her as a "master of thinking in public" is nonsense, I think. As far as I can tell, thinking in public and walking on hot coals are more or less equivalent for Janet Yellen. This is, I think, why Yellen persisted in holding press conferences only after every other FOMC meeting - a decision that implied that nothing would ever happen at FOMC meetings held in January, May, July, or October. Yellen always insisted that all meetings were live, but the off meetings were live in the sense that a person who is unconscious and on a respirator is live - he or she isn't about to get up and run around.

That said, it's hard to see how the Fed will be better-run under Powell than Yellen. The failure to reappoint Yellen is just another instance in this administration of a break with precedent that weakens American institutions - this time the damage is to Fed independence. Further, our progress toward being a gender-blind society has been set back, and that's a big deal.