Prominent among the many appointments that the incoming president will make in the first years of his or her term is that of the next chair of the Federal Reserve. It’s an extremely important position, as the Fed is the primary engine by which the federal government manages the economy.
The tenure of the current Federal Reserve chair, Janet Yellen, expires in 2018. As chair since 2014, she set the nation’s monetary policy during our recovery from the housing crash, opting to keep interest rates near zero throughout her tenure. This has had the broad effect of disincentivizing saving and increasing investment. The strategy was set with the understanding that the Federal Reserve changes interest rates based on two measures — unemployment and inflation rates — and neither has indicated that the economy is overheating and needs to be tamped down.
No doubt, the next chair will be as instrumental in setting the nation’s monetary policy, with far-reaching effects. So how should the next president view the Fed and the role of its chair? Are there any policy changes regarding the institution that the next administration should consider?
Alan S. Blinder is a professor of economics at Princeton University, a visiting fellow at the Brookings Institution, a former vice chairman of the Federal Reserve Board and an informal adviser to the Clinton campaign.
The presidential campaign may not be missing much by skipping a debate over monetary policy and the Federal Reserve — especially if that debate would resemble Donald Trump’s ignorant potshots at its chair, Janet Yellen. Instead, the nation would do well to remember Hippocrates’s wise counsel: “First, do no harm.”
By and large, the Fed continues to perform well the functions Congress assigned to it, and to be genuinely non-political (Trump is wrong about that). The next president should not upset either of these apple carts.
Almost 40 years ago, Congress gave the Federal Reserve a “dual mandate” to use monetary policy to pursue both low inflation and high employment, which is precisely what the Fed is doing today. In recent years, the Fed has turned Congress’ vague prose into specific numerical goals, making it easy for anyone to assess the Fed’s performance. That creates a high degree of accountability.
Not that the Federal Reserve is a perfect institution. Parts of its governance structure read as though they date from 1913 — which they do — and could use a tune-up. For example, Hillary Clinton has suggested removing private bankers from the boards of the Federal Reserve banks — their presence there is a relic of the original Wilsonian compromise between a private institution and a government agency.
And while its communications today are far better than in the old days, when Paul Volcker blew smoke and Alan Greenspan prided himself on mumbling with great incoherence, there is room for improvement. It would be nice, for instance, if the Fed spoke with fewer voices — and in plain English.
Here’s another reform we might consider: The Constitution limits the president of the United States to two terms. Within its narrower domain (managing the national economy), the chair of the Federal Reserve Board probably wields more power than the president. Letting a single person hold that position for more than 18 years, as Alan Greenspan did, seems rather too long for a nation that prides itself on checks and balances. Perhaps the presidential term limit of eight years should be applied to the chair of the Federal Reserve.
Still, contrary to what some critics say, the Fed is not a self-perpetuating oligarchy. The law says, quite properly, that the next president gets to decide whether to reappoint Yellen at the end of her term for another four years or to replace her. This presidential appointment power is “political” in the literal sense, but neither Yellen nor her predecessor, Ben Bernanke, are particularly political people. That’s a good precedent to maintain. Indeed, if the new president feels a need for a “philosophy” about the Fed, I’d suggest this: Don’t politicize it.
Someone should tell that to Congress, which is trying to do the opposite. Start with the innocent-sounding “Audit the Fed” bill, which should really be called “Institutionalize Browbeating of the Fed.” The Fed’s books have been audited for years. What this bill would do is institutionalize congressional second-guessing of monetary policy decisions — something all members of Congress can do whenever they please. Why would anyone want to institutionalize Fed-bashing? The answer is obvious: to intimidate and politicize the Fed.
The second bad idea would force the Fed to enunciate — and then explain to Congress why it ever deviates from — a mechanical formula for monetary policy. A long-running debate in academia asks whether it is preferable to give makers of monetary policy discretion to do as they see fit or to tie their hands with rules. That debate should have ended in 2009, for it is frightening to contemplate what might have happened if the Fed had been obliged to follow a rule during the crisis.
Third, some have suggested dropping the employment goal from the Fed’s dual mandate. Congress has the right to change the Fed’s mandate anytime it chooses, but this is a particularly bad idea. The dual mandate seems about right to me. More important, Clinton opposes changing it, and I think most Americans would agree.
Finally, some members of Congress would like to subject most of the Fed’s budget to the annual appropriations process. Freedom from congressional appropriations is perhaps the linchpin of Federal Reserve independence. A central bank cannot be independent if a displeased legislature can squeeze its budget — as Congress routinely does with other regulatory agencies.
Now, raise your hand if you think Congress can conduct monetary policy better than the Fed.
Seeing none, I’ll conclude that the next president should oppose all four anti-Fed ideas and veto them if Congress passes any. While the institution could be improved, it’s doing pretty well. Congress, do no harm.