The race to be the next chairman of the Federal Reserve is on. But this is a curious sort of race: We don’t know for sure who is running in it, or how the outcome will be judged, or when exactly it will be run. All we know for sure is that Ben S. Bernanke’s term as chairman of the powerful central bank expires in less than eight months, and it would behoove Barack Obama to appoint someone to the job between now and then.
Plenty of media colleagues have weighed in with their best understanding of who might (or should) get the job; here are Al Hunt and Ed Luce, for example. We’ll weigh in soon with an update of this April post judging the odds of various candidates.
But set aside the horse race for a minute. The president and his advisers need to do a thorough, careful job of weighing the candidates and assessing what kind of leadership will be right for the nation’s central bank over the coming four years. It will have consequences as large and as lasting as any other that Obama makes this year. So what are the questions he and his aides should be asking candidates for the chairmanship to try to establish who is the right pick?
Here’s what question they shouldn’t ask: “So, when are you going to raise interest rates?” Any potential Fed chair worthy of being considered would care enough about the independence of monetary policy from politics enough to answer that one with a Cheshire cat grin and a non-answer along the lines of “when the Federal Open Market Committee deems it appropriate to fulfill its mandate.” But there are some other questions the president should ask, and to which he should expect, a thoughtful and persuasive answer. These are five of them.
Is the push toward Fed transparency complete, or is there room yet to go? The central bank has made major strides toward being clear with the public about what it is doing. A generation ago, it did not acknowledge its policy changes publicly at all; now each one comes with a multi-paragraph statement announcing what the Fed has done, and why, and who dissented. Its goals for inflation and unemployment and expectations for how the economy will evolve were merely intuited; now they’re written in plain English for all to see. Since 2011, the chairman has given four news conferences a year; such communication was unheard of not that long ago. But Obama should ascertain whether he is nominating a new chair who will continue on that path or consider Fed transparency a project that is finished. If the former, what sorts of steps toward greater disclosure could you envision?
Do asset bubbles matter for monetary policy? Suppose, Mr. or Ms. Chairman, you become convinced that securities markets, such as for stocks or corporate bonds, are trading far above their fundamentals. What would be your analytical process for determining if raising interest rates should be part of the response? When is a bit of economic weakness a price worth paying to reduce the risk of financial collapse?
What about that mandate? While most leading central banks are charged by their legislatures with targeting inflation (usually 2 percent), the Fed has more of a Rube Goldberg device in which they are directed to pursue both maximum employment and stable prices. That leaves a lot of leeway and room for interpretation, particularly when the two mandates come into conflict. Right now, the two are not in conflict; inflation is lower than the 2 percent the Fed aims for, and unemployment is too high, both pointing to easier monetary policy. But when we arrive at a day when inflation is at or somewhat above the target, but joblessness is still coming down slowly, it is worth knowing how a future Fed chair will interpret the choices he or she faces.
What does "macroprudential" mean to you? The big buzzword of financial regulation in the past few years has been “macroprudential,” which is to say regulating banks not individually in a vacuum, but with an eye toward knowing what risks they may be causing collectively for the economy. But beyond those broad notions, understanding how this works in practice is no easy task. A new Fed chair should have a compelling vision for how to ensure banks and other financial institutions are managed soundly and without risking the system.
What about the system? The chairman of the Federal Reserve is the chief of a sprawling and complex system of 12 reserve banks, along with the board of governors and its staff in Washington. The chair has to make some important decisions on how to run it. How much latitude should the reserve bank presidents have to decide how to regulate the banks in their district? Should the system of 12 banks, created a century ago for a different America, be overhauled? What sorts of traits should the Fed be looking for in presidents of those banks (the decisions are made by boards of directors of each reserve bank, but must be approved by the Board of Governors in Washington; right now they are primarily economists). The Federal Reserve system turns 100 at the end of this year; the next chair needs a vision on how it should change for the next century.