Who Should Serve on the Federal Reserve Board?

With the recent news that Steve Moore and Herman Cain will be nominated for positions on the Federal Reserve Board, there is an increasing focus on the question of what qualities we should look for in a Fed nominee. There are at least five possible criteria for judging a candidate for the Fed:

1. Does the candidate agree with one’s own views on monetary policy?

2. Does the candidate have educational or work experience and credentials indicating an adequate background in monetary economics?

3. Does the candidate exhibit knowledge of monetary economics in their public comments and writings on the subject?

4. In retrospect, do previous policy recommendations by the candidate seem to have been correct?

5. Would the candidate avoid partisan bias when making decisions?

There is some reason to worry that Mr. Moore and Mr. Cain fall short in these areas, although in my view the first two criteria should carry relatively little weight. Even the experts disagree on monetary policy issues, so the fact that a candidate disagrees with one’s personal policy preference is not, by itself, evidence that they are unqualified. And while credentials are certainly a factor to consider, a candidate can achieve expertise without a PhD in economics.

I have greater concern about the other three criteria. The remarks on monetary policy made by both candidates seem relatively uninformed, not backed by solid analysis. Once at the Fed, they will frequently interact with Fed staff members who will present arguments using sophisticated economic models. Will they be able to keep up?

To have influence at the Fed, it is essential that Board members are able to hold their own in policy debates over issues such as the merits of level targeting vs. growth rate targeting (an issue the Fed is now considering). That requires familiarity with the field of monetary economics, which is highly specialized and technical.

Both candidates have argued that monetary policy was too expansionary during the early 2010s, and both recently suggested or at least implied that a more expansionary policy would now be appropriate. While each view is defensible when considered in isolation, there is a great deal of evidence that policy was too contractionary during the early 2010s, as the Fed fell short of both its inflation and employment objectives. If Fed officials could do it all over again, they would almost certainly adopt a more expansionary policy during the early 2010s. So it looks like Moore and Cain were wrong in their earlier hawkish views.

What is even harder to understand is how policy could have been too expansionary during the early 2010s when the economy was deep in recession and inflation was quite low, and yet now be too contractionary when the economy is booming and inflation is closer to the two percent target.

It is not a question of there being no argument for a slightly more expansionary policy today (indeed I lean that way), it is the way that their policy views evolved over time that seems so perplexing. Moore and Cain were both quite hawkish when a more dovish policy was needed, and have recently become more dovish when there is far less need for monetary stimulus. Why?

In recent decades, I’ve read thousands of articles on monetary policy. In addition to Moore and Cain, President Trump is the only other person I can recall whose views on monetary policy switched from hawkish when President Obama was presiding over a weak economy, to dovish when Trump is presiding over a stronger economy. This may explain why some are worried that these are political choices designed to be loyalists to the President.

I’m in no position to judge motives, but the case for appointing Moore and Cain to the Federal Reserve Board runs into obstacles however one views their attitude toward Fed independence. If their change of heart was motivated by political considerations, that would be inconsistent with the Fed’s traditional independence from the rest of the government. When politics influences Fed decisions, it can destabilize the economy.

If we assume that their evolution from hawkish to dovish doesn’t reflect political considerations, that raises another question: do the candidates have good judgment on policy? I am not aware of any coherent economic model, liberal or conservative, which would justify calling for tighter money in the early 2010s and easier money today.

Previous Fed mistakes contributed to the Great Depression of the 1930s and the Great Inflation of the 1970s. As long as the Fed exists we need to avoid having this powerful institution make similar such mistakes, and that means that only the best people should be appointed to the Federal Reserve Board.