Binyamin Appelbaum on Covering the Fed and Monetary Policy in the Trump Era

The Fed should consider making tangible institutional improvements such as increasing policy transparency while encouraging a greater diversity of views.

Binyamin Appelbaum is an award-winning correspondent for the New York Times and covers the Federal Reserve and other aspects of economic policy. Binyamin joins Macro Musings to discuss his work on covering the Fed and some ideas to improve Fed transparency. He also shares his thoughts on who President Trump may choose to fill vacancies on the Federal Reserve and discusses what Trump’s trade policies may mean an increasingly globalized world.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Binyamin welcome to the show.

Binyamin Appelbaum:   Thanks for having me.

Beckworth: It's a real treat. I know many of our listeners probably follow you along in the New York Times, your work on the Federal Reserve as well as your other work on economic policy. Now I was reading your background and you were originally a history major but now you have one of the top jobs on the Fed beat. How did you get from that point to this point?

Appelbaum: I suppose it's as much of a surprise to me as to anyone else. I got into journalism in college, I really enjoyed it and started covering politics, religion, crime, government, all the standard things that a young reporter covers. I was working for the newspaper in Charlotte, North Carolina, which is a big banking center and they needed a banking reporter. The managing editor called me into his office and offered me the job and I told him, it sounded rather boring. He told me that I was the new banking reporter. I wandered into this world, started off writing about finance and banking, housing in particular mortgages. We can talk a little bit about that work. That was my early exposure to finance and it grew from there.

Appelbaum: I worked at a series of papers covering the financial crisis, financial regulation, the debate over Dodd Frank, eventually was asked to start covering the Federal Reserve. It's really been a process of learning along the way. It's been, I think, 13 years now sneaks up on you that I've been covering the economy in various forms and learning about it and trying to understand it, and I really enjoy it.

Beckworth: You're a lifelong learner.

Appelbaum: Yeah.

Beckworth: We all should be, we all should be continually learning. That's great. Now you had a series of articles. I think you're one of the co-authors in Charlotte on the housing crisis titled *Sold in Nightmare.* You won a prize for this, right? Tell us about that and what it covered.

The Housing Crisis in Charlotte

Appelbaum: When I started on the finance the first thing I covered were the big banks in Charlotte and back in 2004 the government was releasing for the first time a new set of data that allowed analysis of whether people of different races were getting mortgages at the same interest rates. We looked carefully at that data and found that there were real disparities by race, even controlling for economic circumstances, and published a series of articles about that, which I thought were rather good and which ran on the Sunday that Hurricane Katrina hit New Orleans. That was the last anyone ever heard of that work. But one of the questions that came out of that work was what's the consequence of getting a higher interest rate? Why does that matter? Our theory was that we'd be likely to see more foreclosures among people who were paying more for their houses.

Appelbaum: We went to the city, Charlotte Mecklenburg County and asked them for the data on home foreclosures and learned that they didn't keep that data. There was no record of a foreclosure. It was not distinguished in county records from an estate sale or other forms of property transfer. Because at the time, foreclosures weren't an issue they seem so much on our mind now or during the crisis, but there was a time before all of that and we mapped it. We were able to extract from the data, our own set of foreclosures, and we mapped it and what we found was, the foreclosures were concentrated in the newest neighborhoods, which is exactly the opposite of what you would have expected to see, historically, people are losing their homes after one or two or three years, Charlotte looked like a donut basically, all the fringe areas where the building was happening is also where the foreclosures were happening, rather than in the old city neighborhoods in the core.

Appelbaum: Instead of being the final stage in the history of the house foreclosure was now an early life stage event. We wanted to understand why that was happening. I spent a year basically, in these neighborhoods, talking with people obtaining their financial paperwork, working through their mortgage applications, trying to understand what was happening and we were able to document large scale systematic mortgage fraud. I think to this day, there's a myth that is remarkably prevalent that the crisis did not involve fraud or criminal conduct that's categorically false. This was a product of large scale fraud both on the part of borrowers and on the part of their mortgage lenders. Certainly in these neighborhoods around Charlotte, we were able to document that on a fairly systematic scale.

Appelbaum: What we didn't understand as reporters at a regional newspaper was where the money was coming from. Of course, the people at the national newspapers didn't understand that either. But the sense that this was being Fed by Wall Street companies like Lehman Brothers that essentially become housing finance firms, that was beyond our understanding of what we were looking at. We had just started to broaden our work to other metro areas when the crisis really began in earnest and the nature of all of this was disclosed, but it was, for me a really interesting education both in the way that the financial system works and perhaps more importantly, the ways that it doesn't, to be able to see the deficiencies at the outset of this work to have been told that the things that we found were impossible.

Appelbaum: That it was impossible that there was fraud on this scale that it was impossible that people were buying homes they couldn't afford that it was impossible that this collapse could happen, and then to see it unfold. It shakes your confidence in the system. I'll say that.

Beckworth: Well, since you had such a great ground view of the crisis, and given your understanding now, from the macro perspective, what do you see as the main causes of the crisis? What caused the housing boom? You mentioned fraud, but were there forces with demand forces supply forces what did you see if you put all the pieces together now looking back?

The Causes of the Housing Crisis

Appelbaum: I think it's a really good question. I think as we gain distance will probably continue to refine our understanding of those events but I do think that one central element was this huge inflow of money into the United States. The easy availability of credit which was a structural issue that had to do with the way the global economy had evolved, and made it very easy and hugely rewarding for people to find ways of making loans. On the other side of the coin, there was this huge structural decision not to regulate the financial industry, and to allow experimentation to essentially leave borrowers to fend for themselves to defend themselves to make their own decisions about products that in many instances could not possibly have been in their interest. This willingness to just trust that market forces would regulate the conduct of the market I think was those two factors.

Appelbaum: The fact that there was so much more money coming into the system and that people were so much more free to use it in the ways that they wanted to me are the two defining elements of the crisis. Motive and opportunity, basically. Then you get a crime

Beckworth: Now, what's also interesting about this period is there hasn't been this my understanding is a lot of prosecution surrounding the fraud is that right?

Appelbaum: I think that this is something that history is really going to indict our criminal justice system for having failed to do. As I said, in my own work, I documented clear instances of fraud on a large scale. Actually, a number of people went to jail as a result of my work, but they tended to be very low level people, real estate agents, mortgage brokers, the Vice President for mortgages at a housing company. But there were companies that were doing this institutionally as their business model. There were banks that were engaged in this at a level of malfeasance that I think they simply have not been held to account for. That's very disappointing. I remember actually a conversation I had with the FBI about this in the heart of the crisis, when I was simply told, listen, this is not our priority.

Appelbaum: We are busy doing other things. Prosecuting mortgage fraud is not what we are doing as a nation. I think that was a huge mistake. It was a huge mistake in the long-term because when we talk about moral hazard, what we're talking about is this learned behavior, that you can do things and not get punished for that makes you more likely to do them again. I think the lesson that the financial system learned from the financial crisis, it was chastened in some respects, but in others, it learned that it has a fair amount of impunity in terms of how it operates that at the end of the day, we're simply not going to hold people accountable for this type of white collar crime. I think that's a really dangerous lesson and I think we will ultimately see consequences.

Beckworth: I'm guessing you were disappointed when the Attorney General said, last administration said that they didn't want to go after some of the executives because it was a systematically important institution. It might create systematic problems with financial markets. What was your response?

Appelbaum: Disappointed is not the word that I would choose. I think he's wrong. That's the most fundamental point. I think his judgment is bad for the country. I think that law enforcement should enforce the law. I think that there will be consequences for the failure to do so.

Beckworth: Okay. Well, very interesting. Is that work archived anywhere for our listeners who want to go see it?

Appelbaum: That's a great question. I don't know. My guess is that it's still on the website of the Charlotte Observer. That's the paper that I did the work for but I'm not actually sure.

Beckworth: All right. Well, let's move on to your beat now. I call it the Fed Beat but you do more than just the Federal Reserve, but you are the Fed man at the New York Times. Is that fair to say?

Appelbaum: Yes.

Beckworth: Okay. All right. What is it like to do the Fed beat? You get up in the morning, how do you stay tuned? What are you doing to be on top of your job?

The Nature of the Fed Beat

Appelbaum: That's an interesting question. The Fed it's a very unique animal to cover. I guess there probably are things like it but it's different than a lot of the things that we do in journalism. It's extremely technical. A lot of the work is translation. Journalism in general, I think it's like, Moses, you go up to the mountaintop, you talk to the experts, you come back down, you explain it to the people. But the Fed is particularly that way or it's a particularly tall mountain. It's a really abstract subject that is often difficult to explain to ordinary people what is happening, why is it significant? How does it affect their lives? There have been times when I felt my job was principally to pick good metaphors for what the Fed is doing colorful interesting accessible metaphors.

Appelbaum: But a lot of my work is to educate myself to make sure that I'm understanding what the Fed is doing to keep up on the literature, on what academics are saying about the Fed, new ideas about the Fed to follow closely the things that Fed officials say. We're always trying to parse the institution and understand both what it is doing and why it is doing those things to anticipate where it's headed. It's a beat that involves a lot of careful reading and thinking and conversation. It's not a beat that particularly requires the type of investigative digging or leaking that is common in some forms of reporting. The Fed is trying to explain itself at least to a point, It's trying to make itself understood. The challenge is to grapple with what it's saying not to gain access to some set of hidden information for the most part.

Beckworth: Well, speaking of that access, do you get access to the Fed official so they say, hey, come into my office, let's have a conversation? Does Janet Yellen ever call you up and do one on ones with you? Do you have that access as a New York Times reporter?

Appelbaum: Janet Yellen has never called me up in quite that way. But I do. I think the Fed wants to be understood. It wants to make itself understood and one thing that it does do is to create opportunities for the reporters who cover it regularly to have conversations with Fed officials for the purpose of understanding what they're doing and why they're doing it. As an institution it does make people like Janet Yellen people including Janet Yellen available to reporters, from time to time, for that purpose, not just at the press conferences that are broadcast but opportunities, I do sometimes have the opportunity to sit down with the chairwoman and to ask her questions and to try to understand what she's doing. I think that's valuable and important.

Beckworth: Do you ever feel frustrated in your conversations like you don't get a straight answer? Or maybe they don't want to comment on certain topics?

Appelbaum: I think it's probably more accurate to say that she is very careful. She and other Fed officials are not inclined to speculate or to leap to conclusions. The frustration is inherent in the structure of asking someone what they think is happening in the economy. If you and I were talking, we'd probably be more willing to say here's what I think is happening with 80 or 60% confidence. A Fed official is more likely to hold back and to say, well, here are the factors here are the unknowns here the uncertainties. We don't know and so that it feels different than a conversation with an ordinary person in the sense that there's a reluctance to attach themselves to views that are not yet well substantiated.

Beckworth: It's the nature of the beast.

Appelbaum: It's the same frustration we all feel listening to Fed officials talk in any context.

Beckworth: I watch fairly closely the FOMC press conferences afterwards and I see you there often you ask your question along with other reporters and we're on Twitter of course FOMC Twitter for those out there who don't know we there's a bunch of us who follow closely and then we're on Twitter expressing ourselves sometimes pleasantly sometimes not so pleasantly. There's times we're like, "Come on be more clear, what do you mean neutral right? What do you mean one off developments and stuff?" Without me putting you in an awkward position, do you ever feel inside frustrations, I wish I could get a little bit more out. I wish it was a little more clear, or what you're saying is, it's the nature of the beast. There's only so much we can expect. This is good enough.

Appelbaum: I'm saying both. There are clearly times when I'm frustrated, and anyone who follows me on twitter will be aware of that. There are clearly times when I feel the Fed could and should be more clear or that it is intentionally obfuscating things that it should be clear about, but I do and there are times when I think they're necessarily doing that, and it's probably the right thing to do and it's still frustrating. You mentioned that I studied history in college, and I still tend to take a historical view of things and I'm very aware that the Fed has over the last couple of decades, transformed fundamentally its approach to disclosure from a time people who followed the Fed maybe for not so long may not be aware that historically the Fed viewed obfuscation as an element of policy.

Appelbaum: It was intentionally confusing. It wanted to surprise markets. It did not even disclose its policy decisions. Markets had to infer changes in Fed policy from the movement of interest rates. We've come a long way. The Fed has really embraced the idea that disclosure and transparency are important and valuable policy tools that shaping expectations as a fundamental part of the work of a monetary policy maker and so that has made my life as a Fed correspondent much easier. There was an era when the Fed might be more inclined to whisper, information in the ear of a particular reporter, to get that out into the marketplace in a way that it could deny. These days communication tends to be as complete as it is, and as transparent as it is. They're not telling me anything, they're not telling the world.

Appelbaum: But of course they could do a better job with it. We can talk about some of the ways I think in particular that they tend to fall short. But it is both frustrating and understandable.

Beckworth: Well, let's do it. Let's talk about some of the ways you feel they fall short.

How Does the Federal Reserve Fall Short?

Appelbaum: I think the economic projections are a joke that persist for purely institutional reasons. The Fed’s failure to improve the quality of that product is a mystery to me. The basic problem for those so the Fed releases quarterly economic projections from its senior officials, the presidents of the Reserve Bank's the members of the Fed Board of Governors. They're not released by name. You can't tell who made a forecast or compare a given forecast to the forecast from the prior period. They're not made on the same baseline. This is remarkable to me. Each policymaker is encouraged to essentially project both how they anticipate the economy will evolve, and how the Fed will react. This has the quality of making the exercise useless and confusing. We repeatedly in recent years found ourselves in the position of having the Fed chair both Bernanke and Yellen, essentially denying the informational value of the projections.

Appelbaum: Why the Fed would ever want to release a document that it needs to disown moments after its release is mystifying to me. Particularly because there are clearly better options they could enforce projections from a baseline forecast, they could be explicit about the identities of the forecasters. They could tie forecasts and projections together so that you at least knew what the baseline was off of which a given set of policy predictions was being made. There are probably other ideas too none of which they've embraced. As far as I can tell, the primary reason is that doing so would dilute the power of members of the board other than the chair, because we would care much less about many of those forecasts if we knew how I was making them. I don't want to, the Fed has certainly never articulated that motive, but I haven't heard a better one. I must say, purely in communications terms, the exercise strikes me as difficult to defend.

Beckworth: Is your sense then, going off of this and this is the summary of economic projections that they come out, does this create more noise and signal is that what I'm hearing?

Appelbaum: In short.

Beckworth: Okay. That's another question I had in general. It seems that there's more speeches and maybe I, you're the historian here you have a better perspective, but there seems to be more information in general maybe more speeches you got the summary of economic projections, presidents say one thing another president says have something else, has all of this on balance been better communication or unbalanced are we seeing more noise to signal?

Appelbaum: The trend is clear. The Fed communicates much more than it did at any point since any earlier point in its history. A particular aspect of that trend that is important is that the percentage of communications that emanate from the chair has significantly declined. Much more of what we hear from the Fed comes from the regional presidents or to a lesser extent members of the Board of Governors. In that sense, particularly if one has a theory that the Fed chair is the dominant voice on policy, there is an inherent deterioration in the noise to signal ratio. I am a little bit and this is a very popular view that this has been bad for the Fed. I'm a little bit inclined to the perspective that those problems are overstated and that there are some real benefits to the cacophony.

Appelbaum: Because I think that there is a diversity of opinion at the Fed, over time monolithic policymaking is probably not a good thing. There ought to be disagreement. These issues are not so clear that one view should prevail and the odds are quite good that some of these diverse opinions will work their way into being consensus opinions over time. We've seen that happen. I really think there's some benefit to particularly dissenting voices speaking out and being heard and that on the whole I think has been a good thing for the institution. Where it causes problems is when it becomes difficult to discern what the Fed’s operative view actually is. There have been times, and I think that problem could be resolved by the chair, being a more forceful public presence. I think Yellen has sometimes left relatively large periods of time in which she doesn't speak publicly and we are left to triangulate the likely miss center of Fed opinion from the remarks of other officials, we assume are x distance from her and I'm not sure that type of trigonometry is useful for markets or for the public.

Appelbaum: But that doesn't mean everyone else should shut up. It just means that there probably is some utility given that the Fed is committed to the importance of communication, there probably is some real utility in making sure that the person who's in charge is speaking with sufficient regularity to make clear what the policy baseline is. Then I think there's a great deal of value in letting, and making sure really that the full diversity of opinions is also communicated.

Beckworth: That makes a lot of sense and I love your term the Fed’s trigonometry. I'm going to have to keep that one in store for later use. I love that Fed trigonometry. Let's go back to this your point about discussion, diversity of views. I think that's very important. I think there's been a lack of that. It's great to see it and one person in particular recently you know is Neel Kashkari. He's been very vocal in his dissent, his recent dissents. The Fed raising interest rates quarter percent, and he's gone as far as to post on medium why he did. It's very clear. That's very refreshing to me. Maybe I'm a little biased because I'm sympathetic to what he says in those posts, question I have and I don't know if you can answer this, when he dissents is he making the case not to just you and me but to the fellow members of FOMC or fellow FOMC members reading his dissents and maybe Neel was right. Is he making a case to his fellow FOMC members?

Appelbaum: I'm sure that's his goal. I can't speak to how effectively he is succeeding. It's interesting when you talk to Fed officials about the act of dissenting. Some of them will express the view that it is more effective to make an argument in the context of the meeting than to actually cast a vote and dissent that dissenting can almost be seen as an act of public protest that indicates the futility of your internal efforts. At times it's a way of saying I give up on these guys, they're not listening. Maybe one should read Kashkaris' descents a little bit in that light. I don't know how successful he is in retailing his views to other members of the FOMC. There clearly is a conversation that's happening. I think the meetings themselves are fairly structured affairs when people come and read prepared statements.

Appelbaum: Fed officials will tell you that's because it ends up being public. I think that's a little bit nonsensical. Hopefully, they'll have the courage to say things that aren't going to be revealed for five years. That would seem like a basic attribute in a policymaker is to have the courage of your convictions, but they claim that this inhibits them. It is in any event, a very structured affair, you can see that when you read the transcripts of the meetings. It tends not to be the case that officials or at least directly engaging each other's views. They're more likely to inquire and make sure they understand what another person is saying than to actually argue with them, those instances are rare.

Beckworth: They're not debating, the Phillips curve is really flat, why do you say that? Not that give and take going.

Appelbaum: It happens and it happens in frequently enough that it really stands out when you're reading the transcripts. It's like this is an actual debate just broke out. That's really interesting.

Beckworth: That is fascinating. FOMC is pretty structured, as you said, pretty much going in what you're going to say, and you stick to your script. They say it's because of the fact that this can be released but you're saying maybe some other motivation?

Appelbaum: I think that historically there is a trend toward a more structured and formal meeting, and a greater tendency to read prepared remarks, and I am willing to accept that some of that is a desire to speak for the historical record. There may be other factors at work that the FOMC over time has become much more homogenous. The share of the members is share a background as trained economists often with some background in the Fed as an institution. There's much less diversity around the table. I think one of the things that Neel Kashkari has brought is he's not your standard Fed president. He has a different background and a couple of the newer members are from a slightly more diverse set of backgrounds and I think that's probably healthy for the institution.

Appelbaum: I don't know exactly why it's so stultified. I don't know exactly why there's there's an absence of debate. On some level, the Fed clearly feels that's not a productive thing to encourage but I don't know why that is.

Beckworth: Well, it's interesting. I wonder if there's more debates than, if you were regional president back in Minneapolis back at the Fed, maybe you're with your staff in the office, and you're shooting the bomb, throwing things around. Maybe the FOMC governors themselves have these debates with their staff. Along those lines let's go to a big debate that is going on right now, at least many of us are having I suspect they are having it despite the limits and challenges of doing it in the FOMC. You have an article that surrounds this and talks about this debate, July 24 article titled, *US Inflation Remains Low and That's a Problem.* Tell us about that. What are the competing theories that Fed officials are entertaining these days?

Why Has Inflation Remained So Low?

Appelbaum: We should probably begin because I get this question all the time is how can low inflation be a problem? This idea perplexes people have been taught or have an intuitive conviction that that inflation is everywhere and always a bad thing to paraphrase Milton Friedman. The basic idea is that a little bit of inflation has some important benefits. In the first place we're not creating measuring inflation, we think we tend to understate it. Actually getting down to measure zero might actually be deflationary. A second issue is that inflation may serve as an economic lubricant basically, because it tricks people into not understanding the difference they don't understand the difference between nominal and real wages or nominal and real prices as a consequence, they make decisions that may not be in their own interest but may increase the efficiency of the economy.

Appelbaum: A little bit of inflationary cushion gives the Fed more power to reduce real rates during an economic downturn. There are a number of reasons why economists think that a little bit of inflation may be helpful. It should be noted that the reasons economists generally regard inflation as harmful, most of the work establishing those downsides has to do with inflation at significantly higher levels than two or three percent. If you ask Ben Bernanke, he I think he's been on the record about this, is there some special magic to 2% as opposed to 3% or 4%, the Fed’s target being 2%, he'll tell no. 2% is established and there may be some special magic to keeping a number that you've established but you know exactly where you are at that low end of the range is probably there's not a real case that it's bad to be at three rather than two and there are maybe some benefits. That's the context of this discussion.

Appelbaum: Then the question that's being debated is why has inflation been so low? Why do we see this persistence of inflation below the Feds two present target since the Great Recession? The article explores a number of the theories, which tend to share, this theories have all been around for a while. Inflation is a remarkable subject because economists have been unsuccessfully grappling with it for a very long time. They really don't agree about how inflation works. In the extreme, one should say if you take a huge amount of money out of the economy, yes, you'll get a deflation and it'll be really bad. If you open the floodgates and you start printing $1 trillion bills, hyperinflation is a product of too much money printing, but the margins in which we're talking about low levels of inflation we don't really understand the mechanics.

Appelbaum: There are a number of different views that economists subscribe to and members of the Fed appear to have a diversity of opinions about these issues, probably the largest camp among Fed officials is the updated Kinsey and camp that holds by some version of a Phillips curve in which there's a tradeoff between inflation and unemployment and if you want to think about the economy as a machine that is going closer and closer to its speed limit, as it starts to pass that limit and overheat inflation is the consequence. When unemployment gets really low, and employers are searching for workers, and they need to steal them by offering them better wages than they're getting at the place where they work now, that starts cranking the engine of inflation, it passes through the prices, and we're off. That's the view that Janet Yellen subscribes to for example.

Appelbaum: Then there is another group of economists and economic thinking that thinks that the supply of money is really determinant and that the Fed has sowed the seeds of inflation at least eventually by it's considerable expansion of the money supply. That there's a lot of latent inflation in the economy as a way of thinking about it. In their view, as well there's reason to be concerned even though we don't see inflation right now, both the Phillips curve camp and that monetarist camp, regard inflation as likely to emerge in the near term because of things that have already happened basically.

Appelbaum: There's another school which has become increasingly influential over the last couple of decades, which really thinks that expectations are enormously important in determining the level of inflation. These are not exclusive views by the way, you can mix and match them to some extent and the expectations view holds that people play a really important role in determining the level of inflation through their own behavior. They essentially are attempting constantly to shield themselves from the inflation that they expect over time. If they expect more inflation they'll demand higher returns on assets, which tends in turn to result in higher inflation. What we've seen is a deterioration in expectations. People have grown to expect lower and lower inflation and that is locking inflation down. It's allowing employers to get away with smaller wage increases and therefore prices to rise less quickly and that the Fed can get itself trapped into a world where it has undermined expectations basically, in inflation.

Appelbaum: Then the final element in this puzzle is the role of international forces. Labor in particular is under a lot of pressure from international competition. It's very easy for employers to say to workers, Caterpillar is a great example of this. People who work at the caterpillar plant at the caterpillar factories in the United States have been through several sets of wage reductions as the company has gone to its workers and said, we will either pay you less in Peoria or we will move this work to China or other markets, and that's disinflationary as well. That has the effect of holding down wages and holding down prices and how large a role that plays is unclear, but it's pretty hard to argue that it hasn't increased as our economy has become significantly more open and integrated into the global economy. What is your sense of the dominant view of the FOMC? Which of those theories do you think is the most widely accepted?

Appelbaum: I think that monetarism probably has the least traction inside the institution of those three, and probably one would say that the Phillips Curve is the most important both because I think it oversimplifies the chair's view a little bit. I think she thinks expectations also are important, but she is at her core, a person who subscribes to that logic that as labor markets tight and inflation will begin to increase. That's probably the most important view at the FOMC.

Beckworth: One criticism I have had is that the Fed has persistently missed its target and to speak to the credibility of the target, which is also a point that Neel Kashkari has done has raised in his post and his comments and a frustration of mine is, after so many years of missing, it's hard to attribute it to one off events. We can always say, had bad luck this year, last year. But at some point, there has to be some Mia culpa, we didn't do things right. Neel Kashkari I think has been very refreshing in that regard. Look if one and a half percent is our target, let just say so, if that's what we're comfortable with. On the other hand, maybe they've truly are trying to hit 2% and they just have been really unlucky. Did that letter explanation I have a hard time buying because it would be the most unlucky institution on the planet. Has there been any deep soul searching in this? And they're like, "Man, this is truly bizarre. What's going on?"

Appelbaum: In the 70s, when Congress first required the Fed to publish targets for economic performance for monetary aggregates for a bunch of stuff Arthur burns infuriated Congress by showing up every quarter with a new set of baselines adjusted for whatever it happened. There was no way to judge the Feds historical performance. He was just basically saying here, it's a new quarter, we've got new numbers for you. I think that's a persistent tendency at the Fed. I think that they're not great at looking back and evaluating experience either over the longer term or the shorter term and saying, "Hey, we missed in the following ways and here's why." There are a number of central banks that are required to do that. The Canadian central bank is by law required to explain why it's missed its targets. I believe the United Kingdom has a similar requirement. New Zealand.

Appelbaum: You can write that into law basically and require the Fed to be a little bit more retrospectively analytical. I think that probably would have some benefits. They may I think they are doing it internally to some extent. But to answer this specific question, I don't hear the Fed, at least publicly grappling sufficiently with this question of why it misses its target every single year, and has done so since the Great Recession, which is by any standard an alarming and consistent pattern of failure, that surely is telling us something and you've not really heard them grappling with it. I guess the caveat to that is QE three was a reaction to that to the Fed has, since the crisis adjusted the path of policy repeatedly to reflect its sense that it had not done enough.

Appelbaum: There is implicit in the fact that the Fed has raised rates much more slowly than it projected and has repeatedly undercut its forecasts. That's an implicit reflection of their sense that they didn't do enough. But I would like to hear more from Fed officials about why they're so wrong about their expectations, because it keeps happening it's happening again this year. Inflation is once again, disappointing forecasts. We've heard young standard say, well, it's because cell phone prices came down and pharmaceutical prices came down. Well, the reasons are not the reason. The fact that something crops up every year just means your baselines in the wrong place and you'd like to hear and the other big one that's going to I think, really needs to be talked about, and we're probably getting close to the point where we can say definitively is that the Fed really insisted that there was a lot less labor market slack than there has turned out to be.

Appelbaum: Not just the Fed, but a lot of prominent scholars were out there yes, structural forces, and boy, we're never going to see those people again, and they were just wrong. Frankly, it was pretty obvious to me that they were wrong at the time. It's always a little bit of an uncomfortable position to be sitting there asking an expert in their field, "Hey, are you sure about this? You really think that something has changed about the basic propensity of adults to work?" But the answer was a very confident yes for a large number of years after the recession, and the evidence is accumulating that they were wrong.

Beckworth: That's very fascinating, because those structural explanations, Larry Summers has one that's I think, a little more convincing that there's been a long ward trend decline, and I can buy that to a degree. But the fact is, if you look at most time series, there's a sudden drop in 2008. Wasn't part of the trend. It was a sudden something changed dramatically that no one predicted I. We recently had JW Mason on he had a recent paper, where he argues effectively, the true Potential GDP could be higher if we ran the economy a little bit warmer. I think that speaks to this question. There's a lot of uncertainty. We don't know for sure what's going on. But the Fed has been very concerned about slack. They believe they've hit full employment and there's questions like you've said, whether they really have.

Appelbaum: To be clear, it's not obvious that monetary stimulus is the whole or partial answer to these problems. There are unquestionably supply side constraints operating here.

Beckworth: No, absolutely.

Appelbaum: The disability program has a one way door and it's clear that there are a lot of reasons drug problems, criminal records. There's a lot of structural factors at play, but the idea that some of those structural factors could be surmounted by running the economy a little bit hot, economists hate anecdotes but there are plenty of anecdotes in the late 1990s, about companies that began to engage with the question of how do we rehabilitate convicts? How do we upgrade the skills of people who could potentially enter the workforce? How do we deal more effectively with substance abuse problems among our workforce, because they had to because the economy was running hot the private sector started to deal with some of the structural impediments in important ways.

Appelbaum: I don't think there's a clean separation between the demand side and the supply side either. You can get a feedback where, essentially the act of running the economy hot forces, it doesn't need to be always the government that's dismantling those constraints, you can give the private sector incentives to begin grappling with those issues, too.

Beckworth: Matthew Yglesias has been asked on this case, you've been very vocal about it. He had a recent piece just yesterday talking about this and his push is, “Look, just keep rates where they are and don't raise them for a while until the economy grows into these rates. You don't have to even cut the rates just stop for a season and see what happens. See if inflation actually does take off.” Well, let's move on. We can continue this conversation very fast and we need to move on some other topics. Let's talk about President Trump's nominees for the FOMC. He's had one actual nomination Randal Quarles, you've written about him. But we've also had Marvin Goodfriend, Goodfriends' name floated around. Also, Gary Cohn potentially replacing Janet Yellen. What is your sense what's going on with all these names?

Trump’s FOMC Nominees

Appelbaum: My understanding from my reporting is that Marvin Goodfriend is someone the administration has settled on as a candidate, it is their intention to nominate him. The one caveat with this administration, which is particular to this administration, is that the President clearly is not bound by the administrative process in the way that he would be in most administrations, and there's always a chance that he will, for whatever reason, decide to do something else but the administrative process has settled on Goodfriend, and why it's taking so long to nominate him is something of a mystery, although it's part of a much broader mystery, which is why has everything taken so long? The question the big open questions, there's a seat that's reserved for a community bank where they're having a tremendously difficult time finding someone for that job, in large part because they want a community banker rather than someone with regulatory experience, which is the way that Democratic administrations have often filled that seat.

Appelbaum: The person who is selected needs to divest their holdings. They need to get out of the business of being a community banker. Finding someone who's willing to do that has proven really difficult. Then there's the chair, which Jenny Yellen term ends in early February. We heard Trump he had an interview with The Wall Street Journal in which he said, which I read him to be saying, he hasn't really engaged with it yet. B It's quite possible that he'll decide to stick with Janet Yellen and C Gary Cohn is one of the other people who he might put there although he thinks as he said that Gary's doing a great job in his current role as the head of the National Economic Council. I don't know what's going to happen. In a political sense, I think there's probably a pretty good argument for the administration to stick with Yellen, because Trump has made clear that he likes easy monetary policy.

Appelbaum: She's going to be as easy as any credible chair, and you can blame her for it. It has some real advantages. If he wants his own person there, the pattern with Trump has been A he doesn't have much regard for academics, seems less likely that he would turn to a professor or even a PhD economist. He really likes business leaders. He really likes people who have experience making money. He likes people that he knows and trusts and that's a list of reasons basically why someone like Gary Cohn might really appeal to him. But we don't know and frankly, I don't think the President knows at this point what he's planning to do.

Beckworth: Has it been surprising to you, though, how conventional these nominees are these names that are floating as opposed to some of the ones we thought we might see coming in during the transition?

Appelbaum: It's surprising in a broader sense, which is that the President on policy issues has proven much more mainstream conservative than he gave indications of being during his campaign. The ideas that were more heterodox or surprising or that had the potential to attract a broader consensus than merely among Republicans have all fallen by the wayside. We've seen none of that. His picks for the Fed are very much in the spirit of Neil Gorsuch. These are people who are the type of people you'd expect a republican president to be sending to the Fed. They're mainstream conservative credentialed people Quarles and Goodfriend. Cohn would be a very different thing. I think a lot of Republicans who are interested in monetary policy will be very uncomfortable with the idea of someone with that little experience in the space and perhaps that close to tie to Wall Street in that position.

Appelbaum: But the picks so far have been very different than his outspoken views on social issues in particular. We've not really seen the guy we saw on the campaign trail when it comes to economic policy, at least at this point.

Beckworth: It's been surprising. Let me throw a crazy idea out there. Do you think Trump has thrown Cohn’s name out there simply to rock the boat at the Fed? Use it as leverage? With NAFTA he threatened to completely undo and suddenly Canada, Mexico comes to the negotiating table. Is he doing anything like that do you think by throwing Cohn’s' name is that giving them too much credit for thinking this through strategically?

Appelbaum: He is clearly willing to do things like that. I think the odds are good that if he becomes sufficiently interested in the question of who should be Fed chair, it will become a reality TV drama. There will be that type of gamesmanship around it. It's not clear to me how interesting he finds the Fed. There was a lot of speculation that he was going to be a lot more outspoken about monetary policy. He has issues that he cares about and issues that he doesn't, and it remains to be seen whether this becomes an issue that he cares about. If so, I think the way that he tends to handle these things like conflict and drama and the prospect that he would be both interested in who the next Fed chair is and that he would smoothly decide on any one candidate is low, but it's not clear to me that the we're going to see him engage it in quite that way.

Beckworth: Okay. Well, let's move on to some other areas you've written on because you are the Fed beat reporter, but you also do some other economic coverage. You've written a lot about trade issues with the Trump administration. You've done some fascinating stories. I've inferred from your tweets and from what you've written, you've actually got to travel on some of these assignments. You made a trip to Iceland, for a story about aluminum. Tell us about that.

Iceland & Alumnium

Appelbaum: I spend about half my time writing about broader economic issues beyond monetary policy, in part because the Fed is a little less exciting right now than it was at the peak of the crisis when it was more of a full-time job to cover all the things that were going on and trade lately has been a big part of what I've been writing about because one of the things have been interesting about the Trump presidency is it's forced us or enabled us to think about a lot of economic questions that we didn't spend a lot of time debating in recent years and one that I think frankly deserves more intention is the impact of trade on the American economy.

Appelbaum: It seems clear to me that both the benefits and downsides of trade were misunderstood and understated really. I think Americans both don't appreciate all the good things that trade brings, and that a lot of policymakers weren't paying sufficient attention to the costs of trade. The aluminum story is a really interesting one. The Trump administration has made a lot of noise about the idea that China is taking over global aluminum production and displacing American industry and resulting in the loss of American jobs. The truth is that American aluminum production has been in decline for a long time because energy is relatively expensive in the United States and that we're already our aluminum industry is already part of an integrated global industry where production happens mostly production of the basic material of aluminum happens mostly in other countries.

Appelbaum: Iceland is a particularly remarkable example of this. It's this small island in the middle of the Atlantic with fewer people than Staten Island and yet it has these vast energy resources, hydro power and geothermal energy. It came up with the rather clever idea of exporting energy by smelting aluminum, which is a hugely energy intensive process, you basically run electricity through a soup of aluminum and aluminum emerges. It requires as much energy to run an aluminum smelter, a big factory as it does to run an American city like Chattanooga, or Knoxville. Iceland is basically exporting packaged aluminum. These are big factories that are owned by American companies, and they now produce as much aluminum as the United States.

Appelbaum: The entire United States and it's remarkable to see so I got to travel to Iceland not just the part of ice on the southwest where everyone lives, but all the way to the other coast, the eastern coast of Iceland, where in this small little fishing town, Alcoa is built, what I'm pretty sure is the largest building in Iceland for the purpose of making aluminum. It was pretty remarkable to see.

Beckworth: This is an example of how trade leads to specialization, different parts of the world based on a competitive advantage of very energy rich there. One of the takeaways I got from this, which wasn't your main point, but they're very self-sufficient in energy. As economists, we don't like to use that term self-sufficiency, but they definitely have enough of their own energy sources in Iceland to take care of themselves.

Appelbaum: That's right. They have far more energy than they have any possible use for. They are sufficient.

Beckworth: That's fascinating. Okay, another article you've written is called a look inside Airbus's epic assembly line. Tell us about that and how it speaks the global supply chain.

Airbus and the Global Supply Chain

Appelbaum: This is fascinating to me. One of the big trends in American manufacturing that we've seen in recent decades is that foreign corporations increasingly are performing final stage assembly in the United States. One of the great examples of this is this Airbus factory in Mobile, Alabama, where Airbus ships the component parts of airliners from its various European factories where much of the work is done to this giant building an old airfield in Alabama where they're assembled into passenger jet liners. Airbus has lower labor costs in Alabama. Which is only sufficient to offset the shipping costs, it's not saving money by being in Alabama it figures that its goal was not to have the assembly in Alabama be more expensive than the assembly in Europe. It succeeded but it's not that it saves money by being here. What it gains is that it's closer to its final market.

Appelbaum: These planes are for American Airlines and there is a sense although no one's quite clear about how exactly this works mechanically, that it is easier to sell things to American customers if they are made in America. Car makers reached this conclusion on a large scale and believe that their sales here have increased as a consequence of some sense among consumers that these Toyotas and Hondas are made here. Airbus is hoping to benefit from a little bit of that same magic. Another really important part of this is for Airbus, access to defense contracts, being able to sell Congress on the idea that Airbus has invested in the United States makes it a more credible competitor to Boeing and other US defense contractors for the really lucrative work that the US government provides. But it's not just companies with defense sector interests that have made this move that are particularly in the south growing clusters of remember when I moved to Charlotte, I was surprised to find that the only daily international flight was direct service to Frankfurt.

Appelbaum: The reason was the Charlotte had carefully cultivated, and the region around Charlotte, a real focus on German industry and the number a significant number of German companies, most famously BMWs largest plant anywhere in the world had moved to that region in order to make their products to finish making their products close to the final market. This is a reflection of lower shipping costs, improved technologies for communication, but also a sense that in terms of marketing and finishing, being close to your final market has real advantages. Maybe we've always known this right. American manufacturers used to do this in the other direction. They used to do final finishing of products in countries where they sold those products and now that we've reached the point where we're becoming the host to other countries companies and that's probably a good thing for our economy.

Beckworth: I'm from the south originally and if you drive down across, you'll see at some point some factory near a highway through there's Alabama or North Carolina. It's fascinating to see these foreign companies build plants in the south. But I want to read your introductory paragraph from this article, because I think it really stresses the importance of global supply chains too and I encourage listeners to look at the article because some really neat pictures you see literally a whole completed part of a plane coming off of a ship a wing fuselage. It's just fascinating to see other fun part of your job traveling to Iceland going to these big factories.

Appelbaum: It's great.

Beckworth: You really are seeing the real economy firsthand, but your introduction to your piece says the ships from Hamburg steaming to Mobile Bay several times a month, loaded upon them are the Titanic parts of flying machines tails already painted, wings already functional, the fuselage in two segments front and rear. The pieces are set on flatbed trucks and escorted by police cars to a decommissioned Air Force Base, Brookley field. It's an odd arrangement for many reasons, not least among them being the fact that the Airbus could assemble its planes somewhere else. You're going to mention the vertical stabilizers made in Spain, the wings come from Wells, the fuselage is from France, the back fuselage is from Hamburg. All these parts are produced and made in different parts of the world and they come and have some part done in the US.

Beckworth: That's true for a lot of goods, that there's this global supply chain network and I want to stress this to our listeners, because this I think it's very important to appreciate when you start thinking about trade wars, and putting up barriers, that you're affecting products that are very interdependent with other countries and if you cut off one part of that supply chain, you could create some big disturbance.

Appelbaum: Absolutely, I think it's a hugely important point and it's one that the industries themselves have been making repeatedly to the Trump administration, in the context of proposals to, for example, impose tariffs on steel or aluminum imports. American manufacturers are not self-sufficient. We were talking about Iceland as a self-sufficient in terms of its energy supply. American manufacturing is integrated into a global economy. What we are doing well these days what brings the highest value to our economy and provides most of the jobs is participating in manufacturing processes that occur across international boundaries. Products often pass over several boundaries during the course of their creation. The one caveat to that which is an interesting one is that it may be the case that has peaked and that China in particular is increasingly seeking to bring within its boundaries, more of the process of manufacturing the various goods that it makes.

Appelbaum: It's an interesting question about whether that disaggregation of manufacturing was a transitional phase or a long-term continuing trend. But in either case it seems certain that for the foreseeable future, manufacturing will remain far more disaggregated than it was in earlier eras and so this will be a continuing reality that, made in America is a really misleading label in almost every instance. Unless it's a banana, well not a banana, it's a terrible example but an apple that was grown in Vermont. The idea that anything is exclusively Made in America is an exception rather than the rule.

Beckworth: It's really important to stress that in terms of jobs, all these jobs in the southeast that are tied to foreign plans that have built there if you suddenly put up walls at those home countries, you're really going to affect jobs in the southeast, among other places, but I stress the Southeast because many voters there supported Trump.

Appelbaum: When you talk to people in Mobile, they'll tell you that they're intensely cognizant of this. They're extremely worried about the idea of the Trump administration will take some action to impede this type of manufacturing because it is what Mobile does for a living. Its modern economy is almost entirely based on this type of integration with the global economy, and it would be devastating to Mobile and a number of other southern cities that have emerged as manufacturing centers were to disrupt the flow of partially manufactured goods across borders.

Beckworth: All right, well, our time is up. Our guest today has been Binyamin Appelbaum. Thank you so much for coming on the show.

Appelbaum: My pleasure.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.