Yesterday the Senate overcame David Vitter’s filibuster and approved two nominees to the Federal Reserve Board of Governors giving it for the first time since 2006 a full complement of Governors. Naturally the question arises of what these two men, Jeremy Stein and Jerome Powell, think about the urgent question of what the Fed should do to help cope with the widespread economic misery stalking the land. And the short answer is we basically know nothing.
The longer answer is that Stein, a Harvard professor, has certainly published a fair amount recently on monetary policy issues. The focus of his research, however, is the important but-not-necessarily-important-right-now question of what kind of role monetary policy can and should play in macroprudential financial regulation. Thanks to tradition and path dependence, many countries—including the United States—charge the central bank with both stabilizing the macroeconomy and stabilizing the banking system. But it’s not super-clear how these tasks relate. In informal discussions, one often hears the notion that the Fed could or should have acted to “pop” this or that bubble in financial markets but, again, these suggestions rarely with specific guidance about how that’s supposed to work or what the relevant tools are. So Stein is potentially bringing a lot to the table on this front, and his recent paper on “The Optimal Conduct of Monetary Policy With Interest on Reserves” makes an important forward-looking argument that the Fed now has additional instruments at its disposal that may allow it to better hit multiple policy goals simultaneously. But none of this is incredibly relevant to the main immediate monetary policy questions facing the Fed. Stein, to the best of my knowledge, has never commented on the question of appropriate monetary policy in the face of zero short-term nominal interest rates and high unemployment.
He did make some comments (PDF) in response to an Alan Greenspan paper back in 2010 that, while mostly focused on the need to regulate bank leverage more stringently, suggested briefly that ultra-low interest rates circa 2004 contributed to the housing bubble.
Of Jerome Powell we have even less to go on, but Evan Soltas found this line in his testimony to the Senate Banking Committee:
In monetary policy, the task will be providing support for the still weak economy but exiting the current highly accommodative policies in time to avoid higher inflation.
I hesitate to read too much into a single remark, especially when made in highly politicized circumstances, but taken at face value this is bad news for America. The implication here seems to be that Powell thinks we need about as much aggregate demand as we currently have and the question he’s pondering is how quickly should we switch to even less aggregate demand. Most importantly, we have Powell explicitly reinforcing the misguided conventional wisdom that the current policy framework is “highly accommodative.” It is true that interest rates are low right now, but aggregate demand—M times V—has been exceptionally low.
This is not how things are typically discussed, but what the Fed really needs right now is someone who’ll bring that perspective into the room. In fairness to Powell, if I were coaching him on what to say to the Senate Banking Committee in hopes of getting confirmed I would have told him to say what he said and not try to get into a fight with members of the U.S. Senate over the appropriate way to gauge the stance of monetary policy. So I think there’s little informational value here. But the upshot of the longwinded story here is that Stein and Powell will increase the total amount of intellectual capacity on the Fed Board as it performs its various tasks, but there’s no clear evidence that it will make a difference to the basic stance of monetary policy.