As Ezra noted, David Wessel at the Wall Street Journal is reporting that Obama is likely to nominate Harvard economist Jeremy Stein and PIMCO vice president Richard Clarida to the two vacant seats on the Federal Reserve Board. If the two are confirmed, they could have a major impact on Fed policy going forward. Thankfully, since Stein is an academic, and Clarida is a former academic and senior Bush administration official who still talks to the press frequently, they both have extensive paper trails that could indicate where they’ll fall on Fed disputes.
In an early 2009 op-ed, Clarida expressed concern that the Fed’s $2 trillion quantitative easing program was too small, a concern compounded by his skepticism about the fiscal stimulus package passed by Congress and signed by Obama. Last fall he reiterated his concerns, saying in a Bloomberg video interview that the second quantitative easing initiative being launched then had the potential to reduce interest rates, but wouldn’t improve the long-term growth outlook. He additionally told the New York Times that the nature of the credit crisis could make it difficult for Fed interest rate policy to affect demand. In a paper co-written with Jordi Fali and Mark Gertler in 1999, he argued for using a simple inflation targeting rule, rather than discretionary central bank action, when making monetary policy. He and his co-authors concede this could constrain banks in the event of a financial crisis, which could call for dramatic discretionary policies. The Fed currently sets an implicit inflation target, while other central banks do so explicitly. Some, such as pre-Fed Ben Bernanke, have argued that crises call for price level targeting, which would allow higher rates of short-term inflation.
Stein has a forthcoming paper with Anil Kashyap arguing that changing the interest on reserves is an effective monetary policy tool. This is different from the conventional Fed approach of trying to change the short-term interest rate, and has been tried with great success in Sweden. He has also written widely on financial regulation. He argued in a piece for the New York Times for much higher capital requirements for banks, and wrote an op-ed for the Harvard Crimson in which he looked back from 2025 at a financial crisis caused by quasi-banks that operated within the limits of Dodd-Frank but still engaged in highly risky investing. He has also written an academic paper arguing that Fed monetary policy can serve a financial stabilization function, and, with David Scharfstein, pushed for the implementation timeline of Basel III global banking rules to be sped up. Given the Fed’s role in overseeing the financial sector, and in particular its ability to set capital requirements, Stein could use his Fed position to push for more aggressive regulation. He and Kashyap also wrote an op-ed for the Times during the bailout debate arguing that the Treasury should gain ownership stakes in banks it rescued, or at least push banks’ bondholders to erase some debt.