Kaleb Nygaard on the Governance of the Federal Reserve System

The incentives and structure of the of the Federal Reserve System are behind many of the challenges now facing U.S. monetary policy.

Kaleb Nygaard is a senior research associate at the Yale Program on Financial Stability and runs the website Centralverse, a place where all things central banking are made clear. Kaleb is also a former Chicago Fed staffer. Kaleb joins David on Macro Musings to discuss the governance and institutional details of the Federal Reserve System. Specifically, Kaleb and David get into President Biden’s nominations to the Fed Board of Governors, the nomination process at the Fed, what is driving the short tenures of Fed Governors in recent years, how regional bank presidents get elected, how social media has impacted the problem of groupthink at the Fed, and much more.

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: Kaleb, welcome to the show.

Kaleb Nygaard: Great to be with you, David.

Beckworth: It's great to have you on. Now, before we get into a fun conversation today about Governor nominations, how we get regional bank presidents, institutional details, just a lot of interesting stuff there, I want to learn a little bit more about your Centralverse. So you have a website called Centralverse and I've checked it out. You have some great articles on there already. You also host some podcasts. So maybe tell us all about those ventures you have going.

Nygaard: Yeah, sure. I was at the Chicago Fed right out of undergrad and was just thrilled to be inside the walls of the central bank. I was so excited to be there. You study this stuff in undergrad and I was in undergrad in Idaho, so very, very far away from the actual central bank. And so getting there was so exciting. And then my day job was good and I was surrounded by interesting people and we were working on data and stuff, but it was very granular as you would expect. This is not uncommon for people coming right out of undergrad, as you study broad stuff and then you're given a very specific narrow task. And so I got six months into my job and I kind of looked back and I realized that I hadn't touched anything central banking big picture.

Nygaard: And when you're in undergrad, another thing that you think about is you think, oh, if I could just be done with these assignments, if I could just be done with the papers and the assigned reading, then I could really get into what I love. And I finished and then six months later and I hadn't cracked any of those things that, in air quotes, that I loved. And so I knew I needed something to kind of give myself a motivation to do what I really love. I kind of bind myself. And so looking around, I had listened to a lot of podcasts, but I was surprised there wasn't one on central banking at the time. So would've been in 2015 and at least not explicitly. And so I thought, oh, well, I'll do a podcast. And so first I started what I called the Bankster Podcast. You actually beat me to the punch by two weeks I think.

Beckworth: Oh, really?

Nygaard: Your podcast, Macro Musings, this podcast here, which I've listened to from the very beginning.

Beckworth: Well, thank you.

Nygaard: Yeah, absolutely. Came out just a couple weeks before. And so I was telling stories of central bank history and just doing some basic kind of intro to central banking stuff, but podcasts are great for telling stories and talking to people. They're not so great at explaining complicated things. And central banks are really quite complicated. And I found that I just was ending up spending more time creating these charts or graphs or pictures trying to show how these central banks worked in a visual format. And so that's where I created the Centralverse as a place to put the how the central bank works kind of material. So my brother is a computer programmer and so he does all these. We try and do these fun interactive graphics. So they're not just static.

Beckworth: Yeah. Very nice. And I should note that your name is pretty amazing too. Centralverse, it's like central banking and universe put together, Centralverse. And the only other website that comes close to yours in originality would be Peter Stella who's been on the show a few times. He has a website called I believe Central Banking Archeology.

Nygaard: Yes. I love that.

Beckworth: Which is fascinating too. He worked at the IMF and traveled around the world, visiting central banks. So he brings that perspective. And so it's great to see this kind of entrepreneurship that you and others are putting out there on a topic as esoteric as central banking but still in a very important one. And let me also note to the listeners that Kaleb is not just making these nice articles and beautiful charts for the web, Kaleb is actually doing research too. So you and I know Peter Conti-Brown, a friend of the show, you have a paper we'll talk about later and you really have done original research. You've dug into the archives. You've gotten Federal Reserve records. I mean, we're going to talk about a little bit the history of appointments, how they're selected and all of that is based on research that you have done. So this is more than just a hobby. It's become kind of a research agenda for you, of sorts. Is that fair?

Nygaard: Absolutely. Yep. It absolutely has.

Beckworth: Well, let's get started then on these topics. And as you know, Kaleb, we just went through President Biden's hearings for the three nominees he put forth, and that was Philip Jefferson, Lisa Cook, Sarah Bloom Raskin. And leading up to that, there was a lot of drama at least for some of them. I guess Philip Jefferson kind of had a smooth ride, probably all the way in and it looks like he's a sure thing coming out of it too. So they've made it through the banking Senate committee. Lisa Cook had a lot of controversy coming and it was generated, but I thought she went through relatively unscathed. Was that your sense or much better than expected at least?

Biden’s Nominees to the Fed Board of Governors

Nygaard: Yeah. That was absolutely one of the takeaways. There was a bet on Twitter between a few journalists about how much time each of them would get. And I can't remember where it landed, but I think that was one of the surprises was given the intensity and honestly, some of the nastiness in the buildup there, it didn't come through as much. And that wasn't the only thing that didn't come through that we'll get to.

Beckworth: Yeah. And then Sarah Bloom Raskin, she had the toughest time at that hearing. And is it your sense that she is a much harder road ahead of her to really make it to the finish line in terms of being a Governor?

Nygaard: Yeah, I think that's right. I think that's the interpretation that has come hold and I think it pans out, it wasn't just her line about her past comments about emergency facilities. And that was a really hard kind of thread that she was trying to put through there trying to show the congressmen who are not necessarily completely up to date on the differences here, but that came through over and over again and then this whole thing about her potential conflict of interest with reserve trust that we don't know a ton about yet, but I know there's going to be more that's coming through. So when you look at them, I think that's exactly right that Jefferson's a sure thing, Cook is much more comfortable than we thought she was before and Raskin, we knew it was going to be tough going into the hearings and I think it still looks pretty tough though doable. I'm not counting all of the votes like I know some of the journalists are, but it may be close.

Beckworth: Yeah. I mean, you can think of complications with, say, Senator Joe Manchin, he's from West Virginia, a lot of fossil fuel industry there, and he might have some concerns. And I know also one of the Democrat senators is ill, I think in New Mexico. He's out right now and the hope is can he get back in time to vote to get that 50 otherwise the Vice President has to step in. But it was interesting the second thing that you mentioned about Sarah Bloom Raskin. So the first one was her previous comments on climate change. The second one though, was related to this FinTech or this financial firm that got a Fed master account. So it's able to have reserves, trade with other banks. It's a great advantage if you can have a master account and many stable coins and others are calling for access to it. I've had George Selgin on the show and that's something he would like to see under certain conditions so that it's safe.

Beckworth: But it's interesting because the Senator for Wyoming, she was really just up in arms about this. And I tweeted out “hell knows no fury like a FinTech scorned when they don't get their master accounts.” So that's kind of the interesting story there. And I guess you don't connect all the dots until it appears right before you. This FinTech and this Senator are really on a war path. They want to make it so they get it too. So it will be interesting, Kaleb, to see what happens there. But let's step back from the nomination at hand. It's been interesting and I encourage listeners to go listen to Kaleb. He always has a great podcast. Is it every Friday it comes out or?

Nygaard: So the Reserve, which is a similar current events interview podcast is not consistent. It's a once a week, but it's kind of on the news of that week.

Beckworth: I guess I listen to it on Friday. I thought maybe it came out on Friday.

Nygaard: There you go.

Beckworth: But Kaleb stays very abreast of what's happening and he'll keep you up to date on this hearing. But let's step back and just talk about this process and the requirements going into it and kind of the whole governance side of the nomination hearing, then we'll eventually move to the regional bank presidents as well. So one of the areas that are required, at least in the past, it's been on paper maybe more than in force is that they come from different geographical areas and you've written about this. So tell us the story that the Republicans push. Now, we didn't hear this in the nomination hearing itself, but it was Senator Toomey made a big deal about it before that. So walk us through that issue.

The Fed’s Nomination Process

Nygaard: Yeah. And that was another surprise given how hard he had pushed on this. So, in the beginning, part of the original Federal Reserve Act required that the Governors have some diversity and that the two areas of diversity that were explicitly called out in the original law was, there was sectoral background, so background of what is kind of sector of the economy that they represent, and then also the geography. It says that the Governors, there should only be one from each of the 12 districts. There can only be up to one per district. And this has been mostly ignored by both the White House and the Senate for much of the history of the central bank. It was put in there for a very obvious reason of some Congressman wanting to make sure that this new central bank wouldn't be just an East Coast banker venture.

Part of the original Federal Reserve Act required that the Governors have some diversity and that the two areas of diversity that were explicitly called out in the original law was, there was sectoral background, so background of what is kind of sector of the economy that they represent, and then also the geography. It says that the Governors, there should only be one from each of the 12 districts. There can only be up to one per district. And this has been mostly ignored by both the White House and the Senate for much of the history of the central bank.

Nygaard: But no one, as far as I could tell, had gone back and actually looked at who these Governors were and how they were related to where they were from. And so I went back and I did that. I looked at all about a 100, some have repeated. So it's about a 100 Governors. And to look at how are they connected to this district that they claim to be from. And it's changed over time. In the early decades of the Fed, in fact the first 40 years or so, it's exclusively either their current job, which is most of the time what you think of when you say where are you from. If somebody that's not living where you're living right now asks you where you're from, you normally say the place where you're at.

Nygaard: Although the question can get more broad and if somebody asked me now, do I say I'm from Connecticut or do I say I'm from Chicago where I came before or Utah, where I was born or Idaho, where I did high school. I don't know. It does get more complicated, but I think that's fair to assume that most people think when you ask where you're from, it's where you're currently living. And that's mostly what it was at the beginning. In the '50s, there was a Governor for the first time that was neither... He was assigned a district from neither where he was currently working, nor where he had ever worked in the past. And it was just where he had grown up. And that was James Robertson. And then it's a few years, we get a few more in the '70s where their connection to this assigned district is their college.

Nygaard: And then you get down from the '90s on, there have only been a few of the Governors that have been assigned a district where they're currently working. And you get all sorts of different things even down to a bunch that five of the recent Governors, their only connection is that they were born in the area. And there's one Governor, Liz Duke, who I could not find a single connection in the public record. And maybe listeners will be able to point this to me of her connection to the Philadelphia district, which is where she's assigned. And this really is basically in the '70s when President Carter wanted to nominate Bill Miller to be Fed chair, he asked the justice department about this clause in the law and the justice department provided a legal memo that's public, that's on Frazier that we conclude in the show notes, which is just a couple pages and it's a really interesting feed.

Beckworth: Yeah, for sure.

Nygaard: And the conclusion is basically the justice department says, "Mr. President, you get to decide. Basically you get to decide what, where “from” is, what “from” means but just be prepared because the Senate has to approve and they can question you on it." And that's what happens and it is brought up in that nomination hearing, but it goes through. And since then, that's basically what it's been. Some it's up to the White House to decide and the Senate can push as much as they'd like. Most of the time they don't push but sometimes they do. Nominee Peter Diamond, in the early 2010s, we got big news there. He was not chosen mostly because the Senate Republicans just really didn't like him, didn't like his work and didn't like where they thought he would take the Fed.

Nygaard: But one of the excuses that they did bring up was this location thing came up again in the Judy Shelton nomination. So it comes up. And I was not surprised that Toomey called this out on the White House. And the White House has a few different avenues of which they can announce where the Governors are from. But it's confusing because when the White House sends over a nomination and this isn't just for the Fed, this is for any nomination, they introduce the nominees as coming from a state. And so for example, with chair Powell that says, "Jerome Powell of Maryland," because that's where his house is, that's where he lives. And then it says, "I want to nominate him to this position."

Nygaard: And most journalists and most, there's even an academic article about this from a Yale law student that claims that that's the White House saying which district they want him to represent. But simply that's not true because first of all, 15 states have more than one district in them. And so therefore that information of having just the state isn't enough and then second, the nominees, those states of which they're introduced as often don't match what district they end up representing. And so there must be some other document happening. Some White Houses make it public, George Bush in all of his nominations, he actually would say Liz Duke, and I can't remember what state she lived in, but let's say it was Kansas, Liz Duke of Kansas is nominated to represent the Philadelphia district.

Nygaard: And so, Bush actually included it straight in there. But as far as I've been able to tell, he's the only one to do that. And I have submitted a FOIA to the Board to get the formal documentation that shows where these nominees are coming from and how the White House defends that. But it didn't come up this time. Toomey sent the letter. It was one of a couple of things that are regarding diversity that he was asking about, we can talk about later. But in the end, they didn't push it. In my opinion, the Senate, and it's really the job of the Senate, should really come together and put together some thoughts and documentation about this, about what they think the interpretation of this would be, so that it gets some consistency going forward and so we don't get ourself in this situation. You can either think that geography is important and therefore it should be followed or maybe it's not important and they can take it out of the law.

Beckworth: Yeah. I remember that the history of this was that they wanted to avoid the money powered from New York City, the East Coast like you said, and I wonder how much bearing net has today if that same concern is here or not. What about the industry requirement, has that also been largely ignored?

Nygaard: Yes. It has been mostly ignored, although it's not been as grievously broken, I guess, quite like geography. It's not quite as blatantly off, although there have been, and it has followed kind of trends in broader society and there's often a complaint that there are too many economists and that was one of Toomey's concerns maybe is that there were too many economists on the board. And the Board has shown both in their staff as well as at the Governor level kind of track the history of PhD economies. And it's really hard sometimes when looking at people's resume to find them as just coming from a single place. But that is an important part and it is included in the law, not just on the Governors, but in the directors of the reserve banks.

Nygaard: It's a little bit different list of which sectors should be represented. But for example, on the directors, labor is explicitly called out in the law and there have been very few in labor on the board of directors. And there's never been someone on as a Governor or even on the one of the reserve bank presidents that came from organized labor. There've been labor economists, but no one direct experience there. So there are a number of different diversity things and that list of what is included in the sectoral economy has changed a few times and it's actually just been expanded each time they add in a few other sectors. Race and gender didn't get added until the late '70s, but there are a number of different places where it's explicitly called out in the law.

Beckworth: So it's interesting, Kaleb, you mentioned President George W. Bush had some appointees and he made it an explicit effort to connect them to places. And I remember Ben Bernanke being tied to, I believe, Georgia or close to Georgia or South Carolina. And I believe that's the Atlanta Fed district. And he hadn't lived there since he was a kid. So there was some commotion, hey, can you really take that seriously? But at least give President Bush credit for making an effort to connect people to certain places.

Nygaard: He was transparent about it, which I really appreciate. I'm surprised that some of his other appointees didn't get called on it more. But there, again, like I said, it's up to the Senate. The Senate gets to decide how much they want to follow the rule or not, which from the outside has to be a little frustrating. And I'll speak for some, not having been obviously anywhere close to the White House, but it also has to be a little bit frustrating for the White House as well as they're looking at this list of candidates, how flexible is the Senate going to be? And it really isn't what the law meant to be that's for sure.

Beckworth: All right. So we got a geography requirement, an industry requirement. Let's go on and talk about the tenure of an individual as a Governor at the Board of Governors. And what we've seen lately is that many of them don't stick around very long. They're appointed to 14 year terms and they can be appointed actually the remainder of someone else's term plus another 14 years. So Alan Greenspan was there for a long time because he had effectively two terms. But most people don't stick around that long. And what's the story behind that?

Explaining the Short Tenures of Fed Governors

Nygaard: Yeah. So there are a number of different theories and all I think contribute in their own way. I'll just talk about maybe three potential reasons that are contributing to this shortened term. And the first I'll mention is pay. These are very long termed positions. And the pool of candidates to be considered are successful people that have a pretty high opportunity cost as far as at least initial pay from coming on. And an interesting note in this and Peter Conti-Brown actually wrote a paper for Mercatus, or was published at Mercatus about this and tracks and shows that not only has Governors’ pay not increased very much over time, but it has not even kept up as compared to the reserve bank presidents.

Nygaard: And so, you look at Chair Powell today who makes about almost half what John Williams makes in New York. And so I think that is worth noting as contributing to this. And then that would be on both. And the pay both affects when they come in, as well as when they leave if they have other opportunities beyond that. I'll mention two other ones, groupthink, now this is one that I think matters a lot. And I don't think it's gotten quite as much attention and I'm not sure quite how it'd be studied beyond interviews. And I don't know how willing people would be to consent to interviews like this or talk about it. But when new Governors get to the board, they have to face four or 500 economists who are there full-time and their job stays as the Governors come and go. And the staff at the Board have an incredible amount of influence on how the policy decisions are made.

When new Governors get to the board, they have to face four or 500 economists who are there full-time and their job stays as the Governors come and go. And the staff at the Board have an incredible amount of influence on how the policy decisions are made.

Nygaard: They are the ones that are often doing the bulk of the work if not a huge portion of the work of deciding what are the options for what policies should be done and what new areas are we exploring is up to the staff. And so I know of at least one example of someone in the last 30 years, and I can't remember if this person has said this publicly so I won't say who it was, but who got to the board, had a pretty short term. And one of the stories that this person tells is upon arriving, the staff kept addressing this person as Governor X, Governor X and this Governor after a few weeks said, "You can call me by my first name. We don't need to be quite as formal."

Nygaard: And the staff really resisted. In fact, actually, as I'm told, they basically said, "No, we won't." And that was at first, he thought, well, maybe that was just out of respect, but it quickly became clear that there was this degree of separation, this a little bit of animosity between the staff and the Governor in the staff telling the Governor kind of, hey, this is your place. You people come, you people go and we provide a good service to you to help you do the job. I think I'm making it sound darker than it probably is in reality, but this Governor didn't last very long. And I think that a single Governor coming in and then kind of they get assigned to work on a couple of committees, but other than that, they're just one person in the committee of seven part of a bigger committee of 19.

Nygaard: And I can see at least for some of the Governors wondering how much of a difference am I making, and depending on the personality, how willing am I to push on the staff to get them to do things that I'm interested in doing. So, I think that is not the traditional kind of interpretation of groupthink, but I think it definitely has something to do with it [the short tenures of Fed Governors]. And then I think the final one, which I also don't think gets talked about enough is for professors, particularly for professors with tenure, there are rules at most universities or there is a tradition that the university will hold your tenured seat for a couple of years to go and do public service.

Nygaard: It helps the university, it's an increased standing. It helps to give the professor some "real world" policy experience, but most universities aren't willing to guarantee a slot for a professor if they leave for more than a couple of years in public service. And I think that rule is a tough one for somebody that is particularly those that are maybe not at the very peak and those that are not taking leadership roles at the board. If the Chair left his institution, Bernanke, when he left the board, if he wanted to get a tenured job, he didn't, he didn't go back to university. But if he had wanted to, I'm more than positive that many universities would've got the money to get him a tenured spot. But if you're a Governor that doesn't have quite as high a profile, I'm not quite sure, it might actually be hard.

Nygaard: And there again, I've heard stories of Governors who left after a short amount of time taking that as a big consideration. And so that's a tough one, because I don't know if you say, do you make the rule that in order to be a Governor, you have to be willing to cut ties, at least formal ties with your professor and does that limit the pool of candidates and then you do this just kind of try and trickle down is that limiting of the candidates that we don't want anyways or is it okay to just come in for a couple of years? It's another thing that I think Congress should take another look at, are the 14 year terms serving their purpose and are they doing what the law wants them to be doing?

And I can see at least for some of the Governors wondering how much of a difference am I making, and depending on the personality, how willing am I to push on the staff to get them to do things that I'm interested in doing. So, I think that is not the traditional kind of interpretation of groupthink, but I think it definitely has something to do with it [the short tenures of Fed Governors].

Beckworth: Yeah. I can mention one name I know. It's well known Jeremy Stein. He went back to Harvard because he had two years and that was it, and he had to get back to keep his job. And there's others as well that would probably fall under that. So those three categories: pay, groupthink, and then tenure. And I was going to come to this later, Kaleb, but on the groupthink, I want to push that a little bit more and talk about another area of groupthink. At least it's alleged groupthink at the Board of Governors. And this is the observation that I don't know how long it's been since they've been doing this, but it wasn't always this way, but Governors typically vote the same way that the Chair does. And there hasn't been a dissent for a long, long time.

Beckworth: I think there was one Kevin Walsh, he voted against the Chair, but for the most part, we don't see this. Do you think that's also an important story? I mean, it could be frustrating if the Governors have to feel like they have to vote with the Chair or maybe voting with the Chair creates groupthink or maybe there's some kind of backdoor dealing I'll vote for your plan, but then the committee I'm on, my bank regulation committee, you're going to vote for me here. I mean, what is your sense of the fact that they all tend to vote together and follow the Chair?

Nygaard: Yeah, I do think it's a choice. I think it is a choice or maybe a value maybe is the right word. That the Fed over time particularly Fed leadership has decided that there is a great amount of value in being a consensus driven organization in that, because so much of central banking depends on credibility and on clear communication that the Fed has decided that when they make decisions, particularly big decisions, it's good to have as much consensus as possible. And so I think a lot of it is self-limiting. Most of the time the story is told and I think this is mostly correct that those doing the self-limiting are the Governors and maybe the smaller or the Governors not in leadership positions.

Nygaard: But I also think it's important to point out that I think it's just as much a limiting factor on the Chair as well. So the Chair will also limit his or her decision making based on where he thinks the committee is that and less, I guess, the FOMC and particularly the Board of Governors. And so when I was asked recently whether these three nominees, these three recent Governor nominees really even matter that much, and the person said, isn't it just the Chair and the head of the New York Fed. And those two are basically the only ones that matter. And I think that's wrong for a couple of reasons. First, I think, I mean, the traditional troika, I don't know if my Greek is pronounced correctly, but it also would include the vice chair.

Nygaard: So minimum, you got to start there as the leading group that are kind of driving the options there. But second, I think it's really important to remember of this idea that the Chair is going to try and do policies that have acceptance across the board. And like when they do the thing, when they did the framework review, that was a unanimous decision. And then in January, they reaffirmed it unanimously. And so they make a big decision about that. And I think if the Fed had decided that it wasn't as important to be unanimous, they could have pushed farther. And I know big fan of nominal GDP targeting and things like that, I think they could have gone farther if they didn't put so much value on moving all together.

Nygaard: And so I think when asked, “does having someone on like Cook or Jefferson in non-leadership positions, but does it matter that much for monetary policy? Will we see big vote changes because of having them on the Board?” I think the answer is that we probably won't see it, but remember that they are defining what the bounds are. And now that we have five nominees from President Biden, I think it would be foolish to think that the boundaries haven't changed of what's possible. And that will only be seen in the medium to long term. And then just don't forget how politically savvy Powell is. And you and many guests before have talked about this. Probably the most politically savvy of all the Fed chairs is that in the full stack since the beginning.

Nygaard: And so you can see him and you started to see it with him with whether it's climate or supervision regulation. You could see him shifting his bounds as he saw who the Governors were that he was going to be working with. And so I think that when a new Governor comes in, they have significant challenges in battling that groupthink. But I'm not of the opinion that the groupthink is so strong that their personalities and their past research doesn't matter.

Beckworth: So the charitable interpretation is that yes, they vote with the Chair, but that vote itself is contingent upon a consensus being agreed on before the meeting actually takes place. So in other words, how does Lisa Cook feel about this proposal? How does Phil Jefferson feel about this proposal on the Board itself? And so they have a feel for how each of other is going to vote. That's the nice way of looking at this, correct?

Nygaard: That would be the nice way of looking. Exactly. And they play around with it on all sorts of ways. I mean, there are government sunshine laws that say that if a certain number of Governors get together, that has to be a formal meeting and there has to be a documentation about it. And so although us Fed watchers end up watching a lot of speeches and things, and think they're talking to us or to markets, I think the interpretation, I'm not the first one to make this, but the interpretation that they're talking to each other, I think we should put quite a lot of weight on that as well.

Beckworth: Well, let me throw a less charitable interpretation out there and you can respond to it. And it may be a bit dated, I'll concede this up front, but I had Andy Levin on the show and he used to be a very senior staffer at the Board of Governors. And he was very critical of what he saw as groupthink at the Fed in particular in 2008 when the economy was falling off the cliff and the Fed was concerned about high inflation. Now, you could point to where we are today and say, well, that's a bygone worry, David, don't worry about that now, the Fed's more flexible, nimble in its thinking, so who cares? But it's an illustration that Andy shared with me of how everyone was kind of on the same page. This is what needed to be done.

Beckworth: Inflation was high, commodity prices were soaring, gas prices were high, and it made them slow to respond to the unfolding crisis in 2008. And he goes, "If we'd had some guy off the street, he would've told the Fed to change your tune. Don't wait till the end of the year before you start doing stuff." Now again, times are different, maybe thinking has changed, but is there a danger that this process, as it is set up, could still be conducive at some level to groupthink in a certain situation?

I think when asked, “does having someone on like Cook or Jefferson in non-leadership positions, but does it matter that much for monetary policy? Will we see big vote changes because of having them on the Board?” I think the answer is that we probably won't see it, but remember that they are defining what the bounds are. And now that we have five nominees from President Biden, I think it would be foolish to think that the boundaries haven't changed of what's possible. And that will only be seen in the medium to long term.

Nygaard: Absolutely. Oh, I think that is a very real danger and I think that absolutely the Governors in order to break from that groupthink, it's hard. It's very hard. And I think that absolutely has to be acknowledged. And during these nomination processes, this comes up as well. And I'm reminded of the Judy Shelton experience in that there were two kind of big camps of those that were... And there's a Venn diagram. There was overlap, but there were two big critiques of Shelton's work and why she shouldn't be on the board. And the first one was that she's just got some crank ideas that she's just a gold bug and just kind of some derogatory terms about the way that she thinks the economy works and that there are certain ways of thought or fields of study or opinions about how the economy work that just shouldn't be allowed at today's Board of Governors.

Nygaard: I think that is incorrect. And I think that's dangerous. I think the critique against Shelton, that is the one that is the reason that I think she shouldn't have gotten in was that she was really flip floppy on what her opinions were and changed it based on the political power. And it was really quite blatant that she was just pandering to who could nominate her to such a position. And so that's what was disqualifying about her, not her views about gold or about how the economy works today. And so you're absolutely right there. And we as commentators and journalists and academics have an important role to play in this that we make sure that when we're talking about critiques that we're focusing them and that a school of economic thought isn't disqualifying in and of itself.

Beckworth: All right, Kaleb, let's move from the Board of Governors down to our regional Fed banks, the Fed presidents. And as you know, there was a trading scandal. And as a result two presidents stepped down, the Boston Fed president and the Dallas Fed president. They're looking for presidents. And last time I checked in, this whole process was a little bit mysterious. How does that happen? And some of the examples that were particularly mysterious were like the New York Fed and John Williams, how did he end up there? Just a lot of mystery from the outside. Now, I think he's doing a good job and he was qualified, but it wasn't very clear how it unfolded or Neel Kashkari in Minneapolis, I believe he was in California. How did he end up in Minneapolis being the head of the bank up there? So walk us through this. What do we know and what should we know about this process?

How Regional Bank Presidents Get Elected

Nygaard: Yeah. There's a lot that we don't know. I guess, briefly I can talk about what we do know, and I think that'll help frame to your point at different parts of this process of the part where there are gaps in what we know. So the reserve bank presidents are chosen by a subset of the Board of directors of the reserve banks. So there are nine directors at each of the reserve banks. Three are bankers elected by banks in that district, three are non-banks elected by the banks in that district and then three are appointed. Non-bankers are appointed by the Board of Governors in Washington. And so you have this set of nine directors. And until 2010, all nine of those directors participated in the process and voted on who they wanted the next president to be of the reserve bank.

Nygaard: In 2010, part of the Dodd-Frank Act was that the three bankers, the ones that our bankers elected by the banks in that district were prohibited from voting on who the reserve bank president would be. Now, a later policy that the Board of Governors put out, it's that there's a whole list of policies that govern how this process works. The policy from the Board of Governors said that these bankers, although they couldn't vote, they could participate in the early stages. So that's the first thing that we don't know much more about. We don't know. We know that all nine directors, including the three bankers, they participate in coming up with a long list. So a long list, they can recommend candidates. They can give their opinion about other candidates that have been recommended. And we don't know when from the very first time that they start the process to when they vote. We know they can't vote, and we know they can contribute to the long list, we don't know in between at what point those three bankers are taken out of the process.

Nygaard: And I suspect that it's different for every reserve bank and it's different for every time that a new president is selected. And that's a big deal. And that is a really big deal. They were taken out. The Dodd-Frank Act took them of the process, because not only does it not look good for bankers to be selecting people that'll be making management decisions about how banks are regulated and supervised. So it looks bad and it is bad. And so they knew that. And so they took them out, but they left in this ability for them to do participate in some ways. And so that's the first thing is we need to know explicitly at what point does their involvement stop?

Nygaard: The second thing that we don't know is, unlike other big policy positions like Supreme… actually, almost everything, except for these reserve bank presidents, we don't get a long list or a short list. Many United States presidents when making nominations, whether it's in judiciary or even at the Board sometimes, they'll give some kind of indication of the type of person or sometimes they'll even put out explicitly a list of people. And so we don't have that. And many people have called for something like that. And so the reserve bank board of directors hire at least one, sometimes two outside executive search firms. And we don't know much about their collaboration. We don't know really anything about that, except for they make public that they have teamed up with somebody.

Nygaard: And then the reserve bank board of directors, those that can vote, once they have come down to their preferred candidate, they send it to Washington, to the Board of Governors and the Governors gives a thumbs up or a thumbs down on that. Now, this comes to kind of a third piece of information that we don't know, and that is, we don't know what that process looks like formally and we don't know what it looks like from on a case by case basis. And so my understanding is that most of the time, the Board of Governors doesn't have a strong opinion and they pretty much give a thumbs up to whoever the Board of directors sends to them. Although, and the Williams example is, and I don't have any inside information, this is just from reporting about it, reporting shows that Powell had pretty strong feelings about wanting an economist in that third troika kind of position.

Nygaard: And so that we knew just from reporting, but we should know more about that process from just a disclosure transparency kind of set as is the Board of Governors involved in the long list? Are they involved in the short list? Are they involved in the interview process? Are they genuinely only involved in giving the very final sign off? And so the Board should publicly say what they will do in general. And then each time there is a process, they should document to what degree they stick within that framework.

Beckworth: Yeah. So it's been my impression, I think you've kind of confirmed this is that when someone is decided upon, it's announced. We don't get names floated out there like you said, unlike say the Fed chairs, is it going to be Powell? Is it going to be a brainer? And then at least allows for our conversation like, well, this is the qualification for each person. So there's a public conversation that goes on. Even if we don't change the outcome, at least we get to air our feelings and our thoughts. Whereas with the president, it's one and done, this is who it is, this is who it will be. And going back, you mentioned Dodd-Frank, it was changed. And was this due in part to the New York Fed and its board? Because if I recall correctly, some of the big banks wronged the Board of the New York Fed and Tim Geitner in some cases was very generous, some of the bailouts. And so even if it was well intended, it didn't look very good from the outside.

Nygaard: Yeah. That is absolutely correct. That had to have been a huge part of the law. Interesting for Geitner having been that person, right? The one that brought on Lehman and Goldman onto the Board and something will have check to see which banks were truly there, but brought them on as to have their expertise and to get their advice, financial crisis giving direct assistance, having direct phone calls with them as rescuer rescue, and then also having conversations as director executive and then Geitner left to the White House and then helped write the law to change kind of how that looked. And in his memo he talks about that definitely not looking good. And it's beyond not looking good. I obviously don't have any evidence that there was any kind of collusion or any special interest given but it really easily could have been and going forward, it could be. And so that was an important thing. I think the law should have gone farther and there's a bunch of different ways that they could have done that. But yeah, that was a big part of it.

Beckworth: Yeah. So the Board of directors is consequential creating the appearance of unethical behavior or not doing his job properly or influencing outcomes, which kind of brings us full circle to the trading scandal that we've had recently. We had two presidents, again, the Dallas Fed president and the Boston Fed president who had to resign. And we also had our vice chair creatively resign for the same reason. But the question has been well, where were the board of directors? Where was not only them, but legal counsel, and maybe you could say, where were they themselves? What were they thinking? This would look like on the other side, but is this an area where the Board of directors should be more actively engaged, making sure that their presidents present the best face forward for the institution?

Nygaard: Yeah, absolutely. And there were many really unfortunate actions taken in this scandal and then after the scandal, by the Fed, and this is a huge kind of dark stain, and it will be in kind of a dark stain on the Fed's history here. But if I had to pick the worst, it was the public letter that the Dallas Fed board of directors published upon Kaplan's resignation. And they just tripped over themselves saying how sad they were and how they just wished he hadn't resigned, which made Kaplan actually look pretty good because it shows that he, at least as far as we know, was not pushed out and that he decided to step down truly because it was a distraction. The board of directors absolutely came across as not only being okay with what he had done, but supportive to the end.

Nygaard: And it just looked really, really awful. And so I think that was the worst of the moment. So they definitely should have been there. They had have explicit requirements and responsibility for things like the audit. The board of directors has direct responsibility for the audit of the reserve banks, things like approving ethics officers and general counsel appointments, all of that stuff. And so they absolutely should have had their hands in this activity beforehand. And then once it happened, like I said, once it happened, they really needed to kind of show that they were truly a director that was looking out for the best interest of the institution and not just their candidate in there.

Beckworth: Yep. So tell us about your research on the regional bank presidents and the banks themselves. I know you have actually done some research, I believe with Peter Conti-Brown, a former guest in front of the show, you've also collected a database. So walk through some of these projects with us and what you're learning about the regional banks through them.

Nygaard: Yeah. These particularly the board of directors are a really interesting microcosm of really what makes central banks interesting. There's just this really fascinating intersection of public and private, of centralized power versus decentralized power, politics and economics, there's a lot of intersections. And so, when I was looking back at some of these directors, I was surprised to see that there wasn't a single list or database of who all of these people were. As of the annual report every year, the Board of Governors in Washington puts out a list of who the directors are, but there's not any other information and no one had done a time series of who they were over time. So I went back through all 108, at the time, annual reports and built the skeleton of every single director that has served at least as of the end of the year.

The board of directors are a really interesting microcosm of really what makes central banks interesting. There's just this really fascinating intersection of public and private, of centralized power versus decentralized power, politics and economics, there's a lot of intersections. And so, when I was looking back at some of these directors, I was surprised to see that there wasn't a single list or database of who all of these people were.

Nygaard: It misses a few if they started and ended before the end of the year, over 2,500 people. And then I expanded the just kind of name and district that they were on to include all sorts of different demographic measures from race, gender, age, to geography, to what company they worked for and what sector of the economy they represented. And so I just built out this just really rich kind of novel data set of who these people were. And then from there, you're able to really, for the first time, answer questions like have the Board of directors fulfilled the legal requirement that they represent in different parts of the economy and how much progress or not progress have the directors or has the Fed each of these reserve banks made in increasing diversity as the '70s law required.

Nygaard: It also, and this is where I'll come to this paper that I co-author with Peter Conti-Brown, the lead author on this paper was actually Brian Feinstein, a special shout out to him from Wharton, a political scientist at Wharton is the Fed provides a really interesting opportunity to do kind of a natural experiment. And that was a big part of the news recently with the Nobel prize for that very reason. And so what you have is you have these 12 institutions who have exactly the same responsibility, but they have different management teams. And so what we were able to do is we were able to compare the diversity in race and gender on these boards of directors of the reserve banks, did that have any correlation with how well banks performed on a certain measurement of how banks are doing lending to low and medium income neighborhoods that's the Community Reinvestment Act?

Nygaard: So the reserve banks are actually all regulators, they gave a rating to all of the community banks, or excuse me, all of the commercial banks about how well they're doing on lending to poor neighborhoods basically. And so what we're able to do is we're able to do this really cool experiment. We're able to connect how these different reserve banks with different leaders are performing. Through their influence, are their banks performing better? And what we found was that they were. That an increased amount of diversity and leadership on the Board of directors correlated quite strongly with a better performance in Community Reinvestment Act scores. And so there are a bunch of mechanisms about how this might happen and there are a bunch of cool controls that we went through not just looking at comparing the reserve bank districts, but only comparing the reserve bank districts within states that have two districts.

Nygaard: The state banking laws are really different. And then to control for geographic kind of economies and things, we ended up comparing just the banks on the borders of the counties within state where these reserve banks provide a boundary. And so it was a really cool paper. And sometimes it's really hard to show strong correlation, much less causation. And we obviously don't show causation, but we show really strong correlation between those. And if you're doing it in other areas of diversity, it's often hard. You can compare Coke and Pepsi, but they're not as similar as it seems. So the Fed itself, and this is one of the reasons that I love the Fed is because of its unique structure, because of its unique governance setup, it allows you to ask and then answer some really interesting questions that are hard to do elsewhere.

Beckworth: Well, very fascinating. We'll provide a link to that research on the show notes for this show. One other thing on the regional bank presidents before we move on and that is the salaries. We alluded to this earlier, you mentioned Powell gets half as much as John Williams. And I remember the paper you referenced, the Peter Conti-Brown paper, another Peter Conti-Brown paper and the one that he did for us. And if I recall correctly, the average regional bank president's salary's around 400,000 and then Powell's at 200,000. And I believe the Governors are below Powell, right?

Nygaard: Just a little bit.

Beckworth: Yeah. So who determines the salaries of the regional bank president? And when I say it's a $400,000 average, there's variation within that number obviously. But does the Board set the salary, the regional bank board set the salary or does the Board of Governors in DC set the salaries for the regional bank presidents?

Nygaard: Yeah. And this is one of the points that we like to make over and over again when talking about the Board of directors of the reserve banks. You can think of them and I think this is Peter's analogy, but you can think of them [regional bank presidents] as a director of a start up in a venture capital or a private equity portfolio company, in that they have a role to play and they end up making a lot of the day to day normal director decisions. But ultimately there's a higher power that has veto power over almost everything that they do. And so, you can think of that with these reserve bank directors as well. Salaries and appointment of officers is very similar in that most of it is done by the directors.

Nygaard: In fact, even one of the surprising just side note, one of the surprising things we found in the paper is the Board of directors are often explicitly the ones making hires for the supervision and regulation department, which is, I think it was at least it was surprising to me that three bankers and then three other non-banks who were nonetheless elected by bankers are explicitly hiring the senior management for those that are going to then supervise the banks. That was a little bit troubling, to be honest. But all of those decisions and to get your point to the salary, they are set by the Board of directors of the individual reserve bank, but they could be vetoed by the Board of Governors in Washington.

Beckworth: So I'm guessing this story is at least in part that they had to offer competitive salaries to keep the regional bank presidents, but at the Board of Governors, they got to keep their salaries in line with the federal government. I think I'm not sure if that's Peter's explanation. I can't remember now, but that would be my first take on that is that they don't veto the growing difference between the Governors and the regional banks, because they want to keep people at those regional banks.

You can think of them [regional bank presidents] as a director of a start up in a venture capital or a private equity portfolio company, in that they have a role to play and they end up making a lot of the day to day normal director decisions. But ultimately there's a higher power that has veto power over almost everything that they do. And so, you can think of that with these reserve bank directors as well. Salaries and appointment of officers is very similar in that most of it is done by the directors.

Nygaard: Yeah. I think that's right.

Impact of Social Media on Groupthink at the Fed

Beckworth: In the time we have left Kaleb, I want to go back to our discussion about groupthink, and I want to talk about an area where maybe there's a crack in the groupthink, and that is from the interaction Fed officials are having on social media. So maybe they're getting one message from their staff, but we know from a Wall Street Journal article that Jerome Powell is on Twitter quietly in the background, but he's watching these debates and that he actually will listen to the conversations on Twitter and then go back to his staff and ask questions.

Beckworth: So that's one way maybe we're broadening the perspective at the Board of Governors. And we are recording this on February 7th, and just yesterday there was an article in the New York Times about the MMT group taking a victory lap, and it's created a lot of blow back, a big kerfuffle on Twitter. And a lot of mainstream economists are not happy about it. But the one thing MMT has done well, whether you agree or not with them, is they've been very good at marketing themselves, pushing their idea out on Twitter through some prominent journalists. I mean, they've made in loads at least with their message and maybe people don't follow them as much as they think they do. But I would say they're successful marketers. And that could be consequential if Fed officials are listening to them, right? And hopefully Fed officials are listening to a broad number of voices, but what is your sense in terms of does social media really matter for policy?

Beckworth: Are policy makers really... We know we've heard Powell but are others, you think, listening and following, and are they listening to podcasts? They listen to your podcast. They listen to my podcast. What is your sense? Are we just talking to each other and to other Fed watchers, maybe some market folks or are we speaking to the Fed officials themselves?

Nygaard: No, I can definitely say that we're not... We may be mostly speaking to each other, but they are listening. They are definitely listening. Yeah, absolutely. And I've gotten notes from people kind of behind the walls that have made comments about Twitter or about the podcasts like I said. So they're definitely looking. I would view this... I would compare this probably to how, and this is maybe too strong a comparison, but for the sake of argument, I compare this a little bit to how the Fed watches, for example, maybe the stock market, in air quotes the stock market, right?

Beckworth: Okay.

Nygaard: If Powell's asked explicitly, hey, do you follow the stock market? Do you care that the stock market dropped? The two points today, he's going to say no, right? Like, I don't follow that. That is not directly influencing whether I am going to go or not. But they're following a lot of different market measures. And they're following to see what are markets thinking and why are they following? Then they'll make follow up calls to see, to try and figure out what exactly is happening in the markets. New York folks, that's like their full-time job is just talking to markets to say, hey, explain to me why this is happening and what do you think is going to happen down the line. And then they pump that back up the other direction. So I suspect that there is a very similar thing happening with social media in that Powell's not going... The previous kind of maybe kerfuffle on Twitter before the MMT excitement was maybe one about this rumor of a 50 basis point increase at the March meeting, right?

Nygaard: And then there were lots of fights. Now, what I would say is that Powell is not going to make the decision and the committee's not going to make the decision based on what they read on Twitter. However, I can guarantee that they are reading those arguments and it is having an influence on what they think. And so these are fun and it's a new world of communication. It really is an increase in transparency even if Powell himself doesn't have a Twitter and isn't coming out. Although every time I get a new follower I would, not many but every time I get one and it's got like numbers at the end or something that I can tell it's either a bot or it may be just one that Twitter assigned. And I always just kind of have in the back of my mind that I hope that one, I think that that's Powell.

What I would say is that Powell is not going to make the decision and the committee's not going to make the decision based on what they read on Twitter. However, I can guarantee that they are reading those arguments and it is having an influence on what they think...It really is an increase in transparency.

Beckworth: One of the burner accounts from Fed officials.

Nygaard: That's right. That's right.

Beckworth: Yeah. No, I've had Fed officials reach out to me anonymously saying, "Hey, we're following the podcast." I've even had some reach out to me. And these are more senior staffers that say you got it wrong Beckworth, this is what it really means. So I have gotten some feedback from some senior Fed officials on this. Going back to the MMT group, and I don't want to spend too much time on them. But as I mentioned, what they've done well is market themselves. And I think some of the intense blow backer anger that we saw these past few days in response to that, a lot of it came from like what I'd say mainstream economists. I consider myself a mainstream economist, but like academics, one particular gentleman from MIT was very, very, I'd say nasty in his comment on this piece.

Beckworth: And I can't help but think that maybe some of the angst there is related to the fact that MMT is so successful at communicating and maybe writing in the top five journal doesn't have the influence it once did because the internet has opened up the doors for anyone who has something thoughtful, interesting to say, right? So as I've said before in another podcast, one reason I do this podcast, and one reason I work at the Mercatus Center is it allows me to get past the gatekeepers of the profession in a way that I would not have otherwise been able to do. So I do think it's important if you've got something to say, you've got to take all approaches, you've got to make a statement out there. So I'm glad to hear you think the same thing and have had the similar experience.

Nygaard: Yep. And that'll be... Yeah. And that's the thing, right? So this is, I'd make one more comparison on this, I guess is if I think of each Governor, each new Governor having important impact on the committee, even just by shifting maybe what the hackers or dovish to oversimplify member is by shifting who that is can have an impact. I think it does have a similar impact of what's the discussion and Twitter just has happened to be normally actually a very good place for these kind of... It crossed the line, I think this past weekend to being not good, but most of the time it's actually a pretty good place for these discussions. And then specifically to the point of like applaud to the MMT folks is you're absolutely right that they have got the media down.

Nygaard: I think Matt Levine, who I just also just love the way he writes, his take on this I think was I guess if you absolutely had to choose between a theory that has coherent equations and testable models versus really great memes is his one was maybe you should choose the one with great memes, because in pausing can you make that social movement such that the voters in Congress or the Governors has not? I think that's obviously oversimplified, but it comes to your point as well that that is a really valuable skill and the economics profession writ large would do well thinking about how do you talk about what you study and how do you make it salient and important? How do you tie it to real life?

Beckworth: Well, great. On that note, our time is up. Our guest today has been Kaleb Nygaard. Kaleb, thank you so much for coming on the show.

Nygaard: It's been a delight, David. Thank you.

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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.