August 31, 2016
The Federal Reserve Board has enormous power over the nation’s economy. Its efforts to promote growth through pushing down interest rates in the wake of the Great Recession have almost certainly created more than one million jobs, while saving homeowners hundreds of billions of dollars in mortgage interest. (The Fed has become especially important in the context of a Congress that shows little interest in doing anything to promote growth and jobs.)
But the Fed doesn’t always act to promote growth and employment. The current debate at the Fed over raising interest rates is posing the question of whether the Fed should be deliberately trying to slow the rate of growth and job creation. Just as pushing interest rates down earlier in the recovery helped to boost growth, raising them now would slow growth.
There are various reasons being put forward by proponents of rate hikes, but most of them center on the idea that we risk seeing the inflation rate rise if the rate of job growth doesn’t slow. The concern is that strong job growth will lead to a tighter labor market, which will allow workers to get higher wages. Higher wages can get passed on in higher prices, and pretty soon we will have a wage price spiral like we did in the 1970s. To prevent this from happening, proponents of higher rates argue that we should raise rates now to reduce the risk.
The central story here is that we are debating a risk of higher inflation in the future, against a certainty of higher unemployment and weaker labor markets in the present. People may differ on how they view this trade-off, which is why it is important to ask who sits at the table making the decision.
Under the current system, 12 of the 19 people on the Federal Reserve Board’s Open Market Committee (FOMC) are presidents of the Fed’s district banks. (Five of these bank presidents have a vote at any given meeting.) The district banks are actually owned by the banks in the district, with the presidents appointed through a process that is dominated by the banks. This means that banks have a grossly disproportionate voice in determining the country’s monetary policy.
This is likely to tilt monetary policy towards being more focused on fighting inflation than might be the case if the Fed was entirely a public institution, since bankers tend to be very concerned about even modest increases in the rate of inflation. Also, as a practical matter, it is unlikely that too many bank presidents are directly hurt by the fact that the unemployment rate is higher than it could be.
This is one reason why the FedUp Campaign, which is organized by the Center for Popular Democracy, is focused on reforming the Fed to make it a fully public institution. (CEPR works with the FedUp Campaign.) The idea is that the people deciding monetary policy should not mostly be bankers. Also, they should not be overwhelmingly white men, which has been the case with the Fed’s district bank presidents. (There has never been an African American or Hispanic bank president.)
St. Louis district bank president Jim Bullard inadvertently made the case for the need for reform in comments last week at the Fed’s annual retreat at Jackson Hole, WY. The Kansas City Fed bank president, Esther George, agreed to meet with people working in the FedUp Campaign and invited other bank presidents to join the meeting as well. In commenting on this meeting, Bullard noted that much of the funding for the FedUp Campaign comes from Dustin Moskovitz, an executive at Facebook:
“Well first of all, I think Dustin Moskovitz should be here. I mean, maybe he could helicopter in from Sun Valley or something. Why is he sending all these people? If he wants low interest rates, why doesn’t he just come and argue about it?”
This comment effectively dismissed the working people who came to express their concerns to the Fed’s bank presidents and staff as simple lackeys of a Facebook tycoon. Moskovitz (whom I’ve never met) has played zero role in setting the agenda for FedUp. He has chosen to support an effort to give ordinary workers a greater say in monetary policy in the same way the Bill Gates has chosen to support the work of thousands of health care professionals in improving the lives of poor people around the world.
Just as the health care professionals receiving support from the Gates Foundation are not lackeys of Bill Gates, the working people who went to meet with the Fed bank presidents are not puppets having their strings pulled by Dustin Moskovitz. These people all have real lives that they took time away from to talk with the leadership of the Fed in Jackson Hole. Apparently Bullard does not think that these people’s views deserve to be treated seriously.
The flip side of his point is that he apparently thinks that Mr. Moskovitz’s views do deserve to be taken seriously and implicitly indicated a willingness to discuss monetary policy with him. Presumably the reason that Bullard thinks Moskovitz’s views deserve to be taken seriously, in contrast to the views of the working people who went to Jackson Hole, is that he is rich — Moskovitz has no obvious expertise on monetary policy.
This shows very well why we need reform of the Fed. There is no guarantee that a fully public Fed will properly respond to the concerns of the nation’s workers and not grant the rich privileged access, but Mr. Bullard showed clearly that this is now at least his practice, if not the practice of his fellow bank presidents. That is a very serious problem.
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