Sam Bell on Fed Policy, Personnel, and Politics in 2021

Lael Brainard and Jay Powell are the leading candidates for the next Fed chair, and either choice could have important implications for the future of the US economy.

Sam Bell is the policy director of Employ America, a think tank dedicated to having the economy run at full employment levels. Sam is also known on FOMC Twitter as an influencer when it comes to nominations for the Board of Governors. Sam returns to Macro Musings to talk about what 2021 likely has in store for the Fed. Specifically, Sam and David discuss Fed Vice Chair Richard Clarida’s vision for temporary price level targeting, the prospects of Jay Powell and Lael Brainard (and others) for the next Fed chair, the significance of Janet Yellen’s treasury secretary appointment, and the political pressures facing the Fed in 2021.

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: Sam, welcome back.

Sam Bell: Thank you so much for having me, David.

Beckworth: Oh, it's great to have you back. I miss our times together in DC, I miss our FOMC watch parties. Luckily, we still have Twitter and I get to interact with you there. But I thought it'd be great to have you back on the show, Sam, because this is a new year, a lot of big potential changes coming up at the Federal Reserve, at the Board of Governors, particularly when it comes to personnel questions. And you have got yourself right there at the center of all this, you have a good sense of what's going on. So I'm delighted to have you on to walk us through some big changes that might take place this year in 2021.

Beckworth: Before we dive into that, though, Sam, as I mentioned, you're the policy director of Employ America, maybe just give our listeners a little bit about what's going on there. The bird's eye view, what you guys are doing right now.

Employ America

Bell: Yeah. So we are dedicated to full employment, tight labor markets, we want rising wages. And we like so many are actually doing more on the fiscal side these days. So my colleagues, Liz and Arnab, we're deeply involved in all of the Congressional, various iterations of relief bills, and specifically on trying to get more generous unemployment insurance in terms of extended benefits. And also, we're deeply invested in the concept of automatic stabilizers. So we want to, as much as possible have relief tied not to some arbitrary date, but to conditions.

Bell: So we're trying to work that and we have been moderately successful on some fronts, not so successful on others, but I'm really lucky to be working with people who are much smarter than I am. And I'm very in awe of their efforts. And yeah, and my colleague, Alex Williams, who just joined us has written something recently, pushing back on the CBO, and how they're thinking about fiscal multipliers in some of these relief bills. And my colleagues, Arnab and Skanda just wrote up a big report about the sector ammunition, taking the CARES Act funds that were supposed to backstop the Fed facilities, taking them back and whether he had legal authority to do that.

Bell: So we're really trying to, I think we're getting more involved in fiscal policy. And we're trying to find these opportunities where a little bit of technical input or a little bit of research will go a long way, potentially, in terms of policy outcomes. That's the snapshot.

Beckworth: Yeah. Now you mentioned you got some smart talent on your team. I want our listeners to know that Sam is the reason we have Employ America. He is the policy innovator here himself, an entrepreneur of sorts. So he brought it together. And that's a nice segue into a question that was asked on Twitter to you. So Sam, you post on Twitter, some questions about coming on this show, and any feedback. And one of the questions that was sent back to you is, how did you get into this? How did you get on this path of becoming a Fed watcher and ultimately, creating Employ America?

Sam Bell’s Background

Bell: Yeah, I'm sort of embarrassed to say that I was somebody who was very focused internationally for the early years of my career, I was doing international human rights, and was basically in a mindset where we have challenges in the United States, but fundamentally, the good I can do in the world is abroad and globally. And the Great Recession really just knocked that out of me. And I really couldn't understand how we were dragging on for so long with so much, what I felt was human suffering, and it drove me into this world, and you and many others on Twitter, helped guide me and helped educate me and simultaneously I was working with organizations, leaders of organizations on management issues, how do you run an organization well.

Bell: And I had a bird's eye view about what folks in Washington were doing, what issues they were working on, and from my personal perspective there was just very little focused on, are we getting macro right? And are the big institutions working on these issues, like the Fed, getting pressured to do better and get to better outcomes? It felt like the... Obviously a lot of people in financial markets are interested, and there's a lot of media coverage but it felt like a very barren landscape and then Fed Up popped up, which was this activist campaign and I ended up doing consulting for them and then out of that found Employ America.

Bell: So I really got lucky and really, Ady Barkan and the Fed Up folks really were the avenue to pull me into some of this Federal Reserve work. And on me, personally, I've been focused on Federal Reserve nominations. And I just saw early on in the Trump period that people who were being in the conversation about Fed chair, their records were undiscovered and even people who I thought should be in the know, didn't know basic things about some of these potential Fed chair candidates. So that really drove me to, make this a full time thing and start an organization and we've expanded from there.

Beckworth: Yes. And you have quite a legacy behind you. Maybe later, we'll talk about some of the Fed governors that didn't happen because of your efforts and your research. And I think we mentioned this on the previous show, that you spend a lot of time in the Library of Congress researching some of these individuals. So you are a familiar face there, based on your Fed research.

Beckworth: All right. So a second question from Twitter for you is: what signs, what dashboard of indicators are you looking for that will tell you, we are getting close to full employment? So we hope 2021 will be a great year, a great boom year. But what will you be looking for, to tell you that we finally have arrived back at full employment?

Indicators of Full Employment

Bell: Yeah. So I would encourage folks to... I think my colleague, Skanda has come up with a brilliant proposal about the Fed and its framework. And you've called it a close cousin of NGDP targeting but he zeroes in on gross labor income growth and says the Fed should be trying to get above a floor for gross labor income growth. And that's what gross labor income is like, it incorporates flows into employment and also wage growth. So we like that. We like that metric. I don't know. That's generally how we're thinking about things, is like, let's get to a floor. So four, four and a half percent would be one floor for gross labor income growth. Another floor would be, what is the reason we can't get back to the year 2000 prime age employment to population ratio? That's one thing that looms large for us, is what are... Intellectually it doesn't make sense why we wouldn't be able to get back, at least to there. So we're looking at, yeah, participation, wages, employment and yeah, a host of other things, but I would identify those three.

Beckworth: Okay. Well, let's move on to the main thrust of our show. And that is this big year ahead of us. And we've just come off a very busy week in terms of Fed happenings. We are recording this January 15th, so this is the week of the 11th through the 15th. Next week is going to be a pretty quiet week for Fed events. This past week was very busy, a number of speeches, if I counted correctly, Sam, there were 13 different appearances. Probably the most notable was Raphael Bostic, in terms of regional presidents. He started raising questions about tapering and the Fed's purchases, got the market interested, some of us understood. But luckily, Jay Powell came along and whacked that one down. I think Tim Dewey had a good article on that, where he said, "Powell has hammered down any questions about tapering. It's not going to happen for a long time and it will happen in very different circumstances." There were also some, I think, great speeches from Lael Brainard and Rich Clarida. And I just want to mention, Rich Clarida's speech, Sam, just indulge me here for a few minutes.

Clarida’s Vision for Temporary Price Level Targeting

Bell: Please.

Beckworth: It's very similar to the one he did in November, and in it, he lays out more of the details on this new framework the Federal Reserve introduced in August, the average inflation targeting framework. I mean, there was some excitement this week because this one year window of at least 2% inflation for one year or more came up, but here is what I liked about that speech, and honestly, I had to read that speech in November several times to understand it, I still have questions from it. I'm not sure I understand everything about it. But he really goes in depth in this article about temporary price level targeting. In fact, Rich Clarida calls it a version of temporary price level targeting like Ben Bernanke introduced in 2017. And then Bernanke, Kiley and Roberts in 2019, had a follow up paper. And it's a version. And maybe you could call it a watered down version, or I with some humor called the poor man's version of temporary price level targeting.

Beckworth: But I like his view of this, and I don't know if this represents the rest of the FOMC's view of it, but I'm excited to see Rich promoting this as a version of temporary price level targeting because Bernanke's original exposition of the temporary price level targeting was it's a framework that does price level targeting when you're at the zero lower bound, and then outside of that you go back to a regular inflation target. And Bernanke is very clear, he said, "Look at the zero lower bound, we've had some very severe demand shocks. And when we get away from that, we don't want to be overreacting because of some temporary inflation caused by supply shocks."

Beckworth: And you start putting that together, you're like okay, "What is their framework that really worries about demand shocks, but wants us to avoid supply shocks?" And to me, as an advocate of nominal GDP targeting, it screams some version of that. What in my mind, temporary price level targeting does is it itself is a version of something like nominal GDP level targeting. In fact, if you look at nominal income, nominal GDP over the past decade, it's been a relatively straight line. And I'm just excited, I guess, Sam, that he sees it this way, because then it really does reinforce the point that Jim Bullard made when this was introduced, that this is a version of nominal GDP targeting. At least a step in the direction of that. I don't know if you have any thoughts on that perspective or not.

Bell: Yeah, I think Clarida is clearly a leader here. I think the question, and I'm always focused on personnel. I mean, I think the question is, does everybody on the FOMC see it the same way he does? On the one hand, he led the process, on the other hand, when he talks about it, it sounds different than when Kaplan talks about it or when Bostic talks about it. And maybe that's okay. But it strikes me that the framework is a little bit in the eye of the beholder. And so, yes, I think I was surprised at him saying that explicitly. And until I saw your tweet that he had said, previously, yeah, I was surprised at his, inflation has to be running above 2% for a year before we're going to raise rates. I think he and Powell are very committed not to become Japan. And you've talked about it on your show a lot. That's their big fear, I think.

Beckworth: Yeah. And that's a great point. Even if Clarida has this vision, does everybody else have the vision? And that's why I have you on, Sam, and that's why I do this podcast. To make sure everyone is singing from the same page of the choir handbook. Okay. So let's talk about personnel, you brought that up. And that's a nice segue, there's a lot of potential changes this year. There's also a lot of maybe new politics weighing into this. So let's talk about the people and the politics of the Fed in 2021. And let's think about the timeline as it relates to that. I think the first big position, that's the Fed chair. So talk us through what's at stake this year and when will this all unfold.

Fed Personnel in 2021 and Beyond

Bell: Yeah. So Jay Powell, his term as chair is up in February 2022. But we probably will have a Fed chair decision this fall. So right now, the Fed chair sweepstakes are about to begin if they haven't already. And I remember in December 2016, there were already contenders, giving campaigning speeches, right after Trump had one about seeming to make their case for why they should be Fed chair. So I think the term is up February 2022, but we'll get a decision, I think probably likely in the fall. I think the two top candidates, I think are Lael Brainard and Jay Powell. We usually have people from the Fed stepping into leadership role. So we don't usually have outside... Or we could talk more about potential outsiders, but I see those two as the top candidates. And I'm happy to talk through what I see as the case for both of them, which I think is a little bit different, even though they're, in some ways, very closely connected and working very closely together.

Beckworth: Yes. Why don't we do that, Sam? Start with Chair Powell. Why he should return as the Chair.

Bell: Yeah, so I think the key thing with Chair Powell is, there's five things I'd love to hit. One, pre-pandemic, he was assaulting the natural rate. And especially the natural rate of unemployment. And that was basically from the start of his chairmanship, he was very skeptical about using these fixed point estimates as guides to policy. And from our perspective at Employ America, even in 2019, when we were way below the committee's estimates for maximum employment, he was saying, memorably, "We need to see heat to call something hot." In other words, we need to see wage growth to call maximum employment. And as late as December 2019, he was saying, "This is just a start," in terms of labor market progress.

Bell: So the fear we had always had is the Fed's going to cut off more employment gains before we actually get to a point when people have rising wages and people on the margins are pulled back in. And he was, at least rhetorically, very much in a space where he was, on our wavelength. And then, you've talked a lot on your show about the response to the coronavirus recession, and we have our issues with what happened. But on the whole, it was aggressive, multi-dimensional experimental response that I think took the crisis very seriously in all its manifestations. And one thing that got a little bit lost, because we talked so much about monetary policy, I don't know if there's a Fed chair who's ever been more vocal about fiscal policy [than Jay Powell] and ever allowed himself to be used as a tool to get more fiscal policy.

I don't know if there's a Fed chair who's ever been more vocal about fiscal policy [than Jay Powell] and ever allowed himself to be used as a tool to get more fiscal policy.

Bell: If you go back and look at Nancy Pelosi's press releases, she is justifying CARES and justifying Heroes on the back of her conversations with Jay Powell. To such an extent that even though he has great relationships, it seems with Republicans in the Senate, by the fall, Republicans were vocally pushing back on him because he was so outspoken about the need for fiscal, that it seemed like he was taking sides in the House Democrats want more, Senate Republicans want less fight about what relief bill. So here's someone who has gone to bat for not just an aggressive monetary policy response, but an aggressive fiscal policy response and basically staked, you could see it as staking the Fed's credibility on that.

Bell: So the third thing I'll say is in September, he led the committee to this very aggressive forward guidance. So the committee said, "We're not going to raise rates until we reach maximum employment and have gotten to 2% inflation threshold." Which for us, that and is so key. So he's saying that reaching maximum employment is a necessary condition for interest rate lift off, which, if you run it back, if we had that in place, it's not clear we would have had any rate hikes from 2015 to 2018. This is like a super dovish, potentially, framework.

Bell: So I would say, that's a point in his favor, and you can see that some of Biden's advisors like Jared Bernstein, and others have talked in a really complimentary way about his leadership in that regard.

Bell: I think to two other things for Powell. One is, Janet Yellen was the first Democrat to run the Fed since Paul Volcker. And she faced sharp pressure on a number of fronts, a number of political fronts, from talking about inequality to the perception that she was too dovish. And I think the simple fact of the matter is, you can get away with more dovishness as a Fed Chair, if you have an R next to your name, and you were appointed by Donald Trump than if you have the progressive label on you. I think that's a real, fair or not, I think that's a real factor. And you will remember, David that when Yellen came in all of a sudden there was like a... I mean, not all of a sudden but there was a heightened clamoring of like, can the Berkeley labor economists do what it takes to normalize interest rates? This whole media cycle and definitely congressional cycle. And I think Jay Powell has the potential to avoid some of that, partly because he's been in the job, partly because he's a Republican.

Bell: And then the final thing which might loom the largest, and I don't know Joe Biden, so I haven't talked to him about this. But he's very much in the mode of an institution healer, whereas Donald Trump was an institution disrupter. And if you think about his time in Washington, so he saw Paul Volcker get reappointed by Reagan. He saw Greenspan get reappointed by H.W Bush, Clinton, W. Bush. And then, of course, Obama reappointed Bernanke. So these are all, the Yellen not being retained was the first time in a very long time we had had a one term Fed chair who wanted a second term.

Bell: So part of me thinks, Biden will want to restore that institutional arrangement where we don't just dump the person because they're from the opposite party if they're doing a good job. So I think all of those things are working for Powell, and of course, there are things that are working against him, that I'm happy to talk about. But-

Part of me thinks, Biden will want to restore that institutional arrangement where we don't just dump the person because they're from the opposite party if they're doing a good job. So I think all of those things are working for Powell.

Beckworth: Yeah. Those are great points. And I just want to go back and touch on a few of them. Your point about Powell being skeptical of U star, R star, I mean, it's so true. And I go back to his speech, Navigating by the stars at Jackson Hole, very clearly laid out that it's difficult to navigate by the stars, if we don't know our R star, our U star in real time. So I think that's a great point. He brings in some healthy skepticism, where maybe someone who formerly trained as a PhD economist may have had a harder time maybe, thinking outside the box.

Beckworth: Now, to be clear, and we had this discussion on Twitter recently, having a PhD shouldn't be a detriment against you. And sometimes you get people, we won't mention any names, but some regional Fed presidents who aren't PhDs who were a disaster, I think both of us would agree, in terms of their policy in 2008. So I think it's the personality more than anything, having a sense of humility, knowing that there's new things to learn and not being preset on a course that you can't vary from.

Beckworth: And another point you brought up, I think is important is it touches on his political savviness. There's an article that mentioned, or he said that he was going to wear out the carpet on Capitol Hill. He made a point to visit, visit, visit, visit. He's a smart operator, and that's worth a lot in DC. More so than knowing the deep underlying equations of a DSGE model is knowing how to reach these people who are going to make your life easier or tougher, depending on where you stand.

Beckworth: And then finally, your last point about continuity and restoring institutional vigor and maybe healing, that's a great, I think, compelling point too. So those are very strong points, all five of them. But I believe you can make a strong case for Lael Brainard as well. So why don't you do that?

Bell: Yeah. So we've said a lot of nice things about Jay Powell's views about labor markets and dovish monetary policy. And he's really... Everything that he's said and done, especially in the last two years suggests he's pretty committed to full employment. But in some ways Lael was there first. I mean, she basically, as soon as she got on the board, she pushed back pretty hard against the move to tighten policy. And we just had the 2015 transcripts, they just got released last week. And she basically says, "I don't think there's a great case for hiking at this meeting." And this is December 2015. "Not only have we not hit our inflation target, and not only are we probably not going to because globally, global situation is getting more complicated and the dollar is getting stronger," and whatever. But she was also saying, "I think we need to look beyond the unemployment rate, and look at participation." And basically suggesting that there was more slack in labor markets. And she didn't end up dissenting, but she was there.

Bell: I think the one counterpoint that critics could come up with was where she and Jay might have diverged is by September 2018, there was a ton of narrative about overheating and we had the Trump tax cuts on top of the budget deal, on top of tariffs. And it was just going to be this perfect storm for inflation. And she said in September 2018, that we would need a year or two more of hikes. So that's like four to eight more hikes after-

Beckworth: Yikes.

Bell: ... the Reagan cycle stopped literally two months later. But I feel like that's a little bit of a blip in her record. And she has been pretty interested and engaged on these questions of reevaluating how we think about labor market slack and how we reevaluate this environment of low inflation, low interest rates. I think that the key thing with Lael is regulations. So if there's a place where there's unified Democratic dissatisfaction with Jay Powell is on the supervision. And one way I like to think about it is, Congress is much more interested in supervision than the president is usually, I think. And you can see that at the Humphrey Hawkins hearings that, this was supposed to be a monetary policy hearing and a lion's share of the questions are about these issues of supervision.

Bell: And so I think there'll be a caucus of folks in the Congress who would prefer Lael to Jay Powell [as the next Fed Chair]. She has dissented at least 20 times on regulatory matters in the last two plus years, which, I tried to go back and count all the regulatory dissents in Fed history, but I only got a few decades deep. But suffice it to say, she alone has more regulatory dissents than all other governors combined, going back-

I think there'll be a caucus of folks in the Congress who would prefer Lael to Jay Powell [as the next Fed Chair]. She has dissented at least 20 times on regulatory matters in the last two plus years.

Beckworth: Wow.

Bell: ... two or three decades, at least, just in the last two plus years. And it's on a variety of stuff. So she wanted the countercyclical capital buffer to be activated. She just sent it on that, she wanted the Fed to suspend bank dividends during this crisis. There's a whole bunch of stuff around capital requirements, liquidity regulations, where she's dissented. But she's both done that and staked her claim that says, "We've gone too far on the deregulatory side." But also, it hasn't all been sour grapes. She's also simultaneously managed to win some fights in the Fed. So most notably on CRA, Community Reinvestment Act, the OCC was trying to do a full revamp, and basically Lael Brainard got the board to push back and take her side. And it became very contentious. Your listeners can look up arguments about that. And then there was a payment systems issue, which I'm a little bit less familiar with, but I think she was internally leading the charge and private sector wanted to do this on their own. And she will she succeeded in persuading her colleagues to bring it in-house.

Bell: Anyway. So I think, this is a, if you remember back to the conversation about Powell, one way people described it was we're getting Yellen on monetary policy, but with a more Republican friendly regulatory posture. Right?

Beckworth: Right.

Bell: You can see the inverse for Lael. So it's like, we're getting Jay Powell on monetary policy, but we're getting a supervision posture that's much more aligned with where the Biden administration is. And one note that's funny on that, Nick Timiraos had a good piece, in which he broke the news to me, at least, that Jay Powell has invited Lael into the troika. Usually, because the committee is so big, usually the Fed chair, the vice chair and the New York Fed president are really teeing up all the conversations and decisions for the committee. And the three of them operate as the command center for the FOMC and that been the case going back multiple committees. And Nick reported that Lael has entered that, so now it's a quartet of officials who are doing that. And that she was in on his call, on Jay Powell's calls with Treasury.

Bell: So it's funny that the two leading contenders actually seem to be working quite closely together right now. And this is all speculation I should say. And it could be the case that Lael Brainard is actually going to move over and become Treasury secretary after Janet Yellen steps down. So maybe this is a moot point. But that would be the main thing I see as the reasons why the Biden people might select Lael.

Beckworth: That's very interesting. And if I can digress just for a minute, back to Brainard's record, her resistance to raising rates in 2015, I think is a very interesting one. And she had the right perspective, she ultimately voted, the voting itself was an interesting story, too. She did it she said, if I understand correctly, to maintain the credibility of monetary policy. She wanted to support it, even though she was uncomfortable with it. And that's something that just the politics, the internal getting votes on one issue, supporting someone on another issue, that by itself was a fascinating conversation. But Brainard's view, I think she had it right, one of the few people in the board who had it right or at the Fed who had it right. And that is the Fed talking up rates in 2014, led to a higher expected path of rates in the future, which helped contribute to the dollar's rise, which in turn, helped slow the global economy down. And she saw that. I mean, she saw that the rate hike talk was coming back to bite the US economy in the rear. And I appreciate that about her.

Beckworth: And I think probably that has something to do with the fact that she oversaw international affairs at Treasury. She's really into the international economy and has, I think a rich perspective to bring. And I think that's valuable in the world we live in, where we are very globalized system. And the dollar is so important. It's good to have someone who can keep the focus on that. But two very interesting contenders. Now, do you have any one outside that group there? I mean, any outsiders who have been discussed, who could possibly make the cut?

Bell: Yeah. This is me speculating. The treasury secretary and the chair of the Council of Economic Advisers are always thrown into these conversations. So Cecilia Rouse wouldn't seem to be based on her academic focus, someone who would be in line for this. But she's in a prominent position, she's super accomplished. So you can never count out the people working most directly with the president. And then obviously, Janet Yellen is treasury secretary and there would be some sort of, I don't know if it's full circle-ness, she got passed over by Trump and got to finish her second term with Biden.

Beckworth: Yeah.

Bell: I'm skeptical of both of those. There's one other person, Raphael Bostic was in the Obama administration, now he's the Atlanta Fed president. And so he's already in the Federal Reserve System. And his name came up a bunch for treasury secretary and has come up a little bit, people speculating about Fed chair. I think the challenge there is, in my mind, he's clearly not as progressive on the labor market pieces and not as dovish as either Brainard or Powell. And as you said earlier in the program, he's talked up tapering recently, he talked up a rate hike, basically trying to move up the timeline for rate hikes, potentially to 2022. And even before that, he even while Jay Powell was saying, "We can't take NAIRU too seriously," Raphael Bostic in his first big speech was saying, "We can't actually let unemployment go below CBO's definition of NAIRU or really bad things will happen." So I wouldn't be surprised if he became the pick, but there's at least been some buzz about him.

Bell: And then there's always private sector people who enter the conversation. I find it hard to imagine going straight from outside government to become Fed chair. That hasn't been the pattern of the last many years.

Beckworth: Okay. Well, let's talk about some of the other openings at the Fed. So another position that may come open is the vice chair for supervision. Doesn't Randal Quarles' role end this year?

Bell: Yep. So Randal Quarles' term ends in October as vice chair for supervision. He might end up staying on the board a little bit. His term at the Financial Stability Board, where he is also, he chairs the Financial Stability Board, which is the international group of central banks. And that doesn't end until the end of this year, but his term as vice chair ends in October. And that's a highly consequential pick. Because it's, as I told you, I mean, from Congress' perspective, he has been enemy number one for congressional Democrats. Chipping away at Dodd Frank, in their view.

Bell: And so this will be a place where there'll be a very stark... There might be continuity in other places on Fed, on chair and vice chair. This is a place where I would imagine a pivot. And yeah, there's many candidates you could think about, Nellie Liang was rumored to be going into Treasury, she was formerly at the Fed. She was actually nominated by President Trump, but Republicans in the Senate pushed back really hard on her because she had a reputation as a regulator who had implemented Dodd Frank. And she's a former colleague of Janet Yellen. So you can imagine her as a potential. I think, and I have no intelligence on this, but you can imagine someone like Bharat Ramamurti, who worked for Elizabeth Warren, and then he was on the oversight commission that Pat Toomey was also on. And he would be the Dan Tarullo model, where he's a lawyer and he's worked in policy and politics and on these issues and would be coming in. But I have no intel on any of those positions. I'm just speculating about the profiles of people that you can mention in that role.

Beckworth: Yeah. So they got to be people who have a fairly high profile, in addition to having the policy chops to fill the position. So you can't just pick someone who might be really good with financial regulation, you got to have someone who's been active, who's known.

Bell: Yeah. I think there will be a desire to make change right away. So I'm imagining the Biden team doesn't want to go through the learning pains, somebody having to get up to speed on either the current Fed architecture or the Fed itself, which I would think lends itself to someone who's really been engaged in a direct way in these debates. That would be my guess.

I think there will be a desire to make change right away. So I'm imagining the Biden team doesn't want to go through the learning pains, somebody having to get up to speed on either the current Fed architecture or the Fed itself, which I would think lends itself to someone who's really been engaged in a direct way in these debates.

Beckworth: Well, let me throw out three names, which I haven't heard, but just to make it interesting and maybe stir the pot a little bit for the Biden's transition team. If we're going to fill that position, it is going to come open, I mean, why not? Morgan Ricks, Lev Menand, Kate Judge. I mean, these are people who I think are following this conversation closely. There's others and I apologize, I didn't list everyone who has been a part of this program or I'm engaged with on Twitter. But those are three people just atop my head who seem would fill that Dan Tarullo kind of role.

Bell: Yep. Yeah. I think them and there's a whole host of other people we're probably forgetting-

Beckworth: Yep.

Bell: ... that... And I think Lev was on the transition team for Biden this time. But yeah, there's no shortage of people who have expertise in that area.

Beckworth: Okay. And finally, the open seat at the Fed. So the one that you helped keep open, Judy Shelton's seat. Any talk about that?

Bell: I haven't heard any talk yet. I think they can do it anytime once he's-

Beckworth: Yeah.

Bell: Once Biden is inaugurated. Obviously, they have a whole bunch of positions to fill in the government. Nominations to make at Treasury and all the other executive agencies. And what I would like to avoid is a situation like we had during the Obama administration, where there was an initial Dan Tarullo appointment and then there were three seats that were left open until April 2010. So hopefully, we avoid that kind of delay, it would be nice to have a fully staffed Fed board.

Bell: But from my perspective, I'm hoping that what they'll consider is folks who are both progressive or aligned with us on how we think about priorities, but also people who can win arguments internally. I think that's an underappreciated point, which is like, it's one thing to agree with me, it's another thing to be able to agree with me and to win the day at the Fed.

Beckworth: Right.

Bell: I think people like Julia Coronado, who's a friend of the program, who's a former Fed staffer, is someone who would come in and right away be respected and listened to and know the building and she's been very upfront on a number of different topics that are important to us. But I'm hoping that balance of, yes, focused on full employment, focused on, but also can actually move things inside the building.

Beckworth: Yeah, very interesting and something to follow closely as this year unfolds. Go ahead.

Bell: One thing I should say is, our mutual friend, Kaleb Nygaard, just wrote an op-ed about labor. And he went back in the archives and actually, even though the Federal Reserve Act says that Fed officials should come from all various walks of life, we've never actually had a sitting member of the FOMC who comes from labor, like any labor alliance institute.

Beckworth: Interesting. Yeah.

Bell: And Bill Spriggs, who's the chief economist at AFL-CIO, a very accomplished labor economist, he would seem to slot in there and he would seem to be consistent with the Biden theme of elevating labor and balancing things out in terms of capital and labor. So that would be one way they could go as well.

Beckworth: Well, we will look forward to seeing this unfold. And again, you will be on top of it. So we will follow you on Twitter, Sam, and we may get you back on the show later in the year, when we have an update on some of these positions. Okay. So that's the Fed itself. Of course, the Fed doesn't operate in a vacuum. There's political pressure, there's DC around, it's running the government. So there's a lot of politics at play as well. So let's talk about that now. We have a new chair of the Senate Banking Committee, Sherrod Brown and what does that mean for the Fed going forward?

Political Pressures Facing the Fed

Bell: Yeah, actually, as I said before, I think Congress when it comes to the Fed is much more concerned about the supervision, aspects of the Fed, whereas the president is concerned about the monetary policy.

Beckworth: Yeah.

Bell: And if you talk to folks on the hill, I think the thing that they're most frustrated with are on the supervision side. So I can imagine a lot of focus there. It is interesting that Senator Brown, last year released a bill basically authorizing or demanding that the Fed create bank accounts, so Fed accounts. I think he called it digital wallets in his actual legislation. But I think he is interested in this issue, especially after the CARES Act and after the 13(3) facilities. I think we will see a much more emphasis on how can the Fed work more directly with households or small businesses in a crisis? And I think there might be appetite to look at how can we do better next time on the 13(3) facilities. And that may require new authorities. In a 50-50 Senate, where I'm a little skeptical that big Fed legislation would have the votes to pass, reforming the Federal Reserve Act or anything like that.

Beckworth: Okay.

Bell: So I would expect that a lot of focus in the hearings on the supervision piece and then maybe also a focus on this, how can we give the Fed more tools to be not necessarily having to work through the financial system.

Beckworth: So the emphasis in Congress will be on regulation, maybe giving a few more tools in the margin, but what you didn't say is, will they be on top of the Fed about this new framework? And that's what I'm wondering, will Senator Brown be saying, "Hey, are you guys living up to your new framework or not?"

Bell: Yeah, it's an interesting question. I mean, I'm not necessarily expecting a ton of backsliding from the Fed in 2021 in terms of their forward guidance. But yeah, hopefully, if there was, we would see, and we saw. I was pleasantly surprised, the last two years we saw much more engagement, especially on the House side. Everyone from Trey Hollingsworth, to AOC engaging on these questions. So I just don't know. Yeah, I think that will come up in the hearings. I just don't know that there'll be a legislative push or anything of that sort related to Fed framework.

Beckworth: Okay. What about the president? So Joe Biden is now the president, last evening, he introduced a big stimulus bill, some people are calling it the fiscal Palooza. Let me just run through some of the numbers, 400 billion toward the COVID response, one trillion divided between $2,000 checks and $400 unemployment insurance 440 billion in small business communities, another 130 billion for schools. And there are a number of other items in there, but it's a pretty large number, 1.9 trillion total. A good chunk of the economy. I mean, depending on where you measure, where nominal GDP should be, it could be eight to 9% of the dollar size of the economy. So that's a fairly large bill. What do you think this means for the Fed in 2021?

Bell: Well, I think they have to be happy about it. I mean, they were sort of asking for it. I mean, not sort of, it seems like they're asking for this sort of sized fiscal package. And not just the size, I mean, [the Fed has] been pretty clear, there's a macro aspect to this and getting the macro dials right, and then there's a relief aspect to this, where there's a segment of people who desperately need help and need it in big quantity. And there's a huge investment we need to make about defeating the virus.

[The Fed has] been pretty clear, there's a macro aspect to this and getting the macro dials right, and then there's a relief aspect to this, where there's a segment of people who desperately need help and need it in big quantity. And there's a huge investment we need to make about defeating the virus.

Bell: So I have to think they're pleased with it, and I don't know that it changes their... It seems like, at least Powell and Clarida and Brainard are in a position where they're as close to whites of inflation's eyes as you can get and they're saying, "This is great, but we're not going to change things in expectation that fiscal will have a big pop. We want to see it. Show us the inflation outcomes, show us the labor market outcomes. And then we can talk about adjusting." So from their point of view, I guess maybe the way to put it would be, it's hopeful that we're in play for better outcomes, but I don't see them changing anything until we actually see those outcomes.

Beckworth: Okay. So you, I think are a little more optimistic that they will stick through with their commitment in this new framework. I'm a little more worried. I'm a little more worried that when inflation does pass 2% there's going to be this large outcry from public commentary, from the media, from Wall Street, even from Congress, "What are you doing? What are you doing?" And I think I have some reason to be worried that this is going to happen. I already see some articles talking about this, when the 10 year Treasury yield went to 1.10%, people were talking, "What does it mean?"

Beckworth: But moreover, if you look at forecasts, so you look at consensus forecasts, if you look at breakevens, if you look at the Fed's own SEP forecast, where inflation will be in three years out, it's 2% at most. You don't see evidence of a makeup, you don't see, I would want to see a little bit more progress, and I'm not seeing it. And I'm just wondering if the public has not internalized what this new framework means. And therefore when the Fed does come, let's say second half of 2021 and the economy's running really hot, say inflation hits 3%. What are they going to do? Are they going to say, "Hey, just see through it, the dollar's well." I mean, I think, to flesh this out, I think this is one of the challenges of an inflation framework.

Beckworth: And I know that's why your team and myself, we advocated a nominal income approach. This should be sold as, “we're restoring your incomes to where they would have been in the absence of the pandemic,” but the way they're going to have to sell it because it's an inflation targeting framework is, “we need inflation to be higher temporarily.” And that to me is the political economy challenge of this framework. But you, I think, are a little more optimistic that they can still pull it off. Is that fair?

Bell: Well, I don't know. It's a great question. And it's a committee. So I did a Twitter poll a few months ago, and maybe this was before coronavirus, and I asked, "Would Jay Powell be singing this full employment song if inflation was 2.3 instead of 1.7?" And a lot of people were skeptical that he would be. I guess I'm a little bit more hopeful, given that and, that key and, in their forward guidance for us, made a lot of difference. But I agree, I think we should be skeptical until they prove it. And yeah, it will be a different environment if we have 2.8, 3.1, whatever and the conversation changes, both on the FOMC and in press and congressional hearings. So, yeah, we should wait till we see the whites of the framework's eyes before we lend in our skepticism.

Beckworth: Exactly. And that's where your organization and my program need to step up and say, "Look, Fed, this is how you explain it. You explain it in terms of dollar incomes, not inflation." But you need to really market and pitch the right angle. In fact, Sam, I recall at a visit we had with Chair Powell, the two of us and Karl Smith, and we tried to make this point, "This is the way you're going to make this policy work, is you need to talk about higher incomes." We were actually trying to pitch nominal GDP targeting or labor income. But I think in general, this is the way you understand makeup policy.

Beckworth: Okay. With the time we have left, let's transition into the treasury secretary, Janet Yellen. You already mentioned her, but she could have a large role both in terms of what the Fed does, because she might shape some of the people who get appointed. But she might also work in a way that treasury secretaries haven't worked before in coordinating policy between Treasury and the Fed. And maybe she'll advocate, some have suggested she might advocate for policies that would require support from Congress to take an active role, such as the central bank digital currency, something along those lines. So do you see her as being pivotal or important in what the Fed does this year?

Importance of Janet Yellen as Treasury Secretary

Bell: I don't know. I don't know. I mean, she definitely, I think, will have a big voice on the nominations front. Your listeners will remember that Steven Mnuchin is the reason why Jay Powell became Fed chair. He maneuvered that so that the Jay Powell became Fed chair. So Treasury secretary will have a big influence there. I don't know how much action there will be on 13(3) programs. And in the absence of that, I don't know what she will push in terms of Fed policy. And I think ultimately, [Yellen] and Powell are both institutionalists and I think she will be careful about overstepping her bounds and being seen as entering the Fed's turf. And frankly, there's a lot to do on the other aspects of the job. So I don't know. If I had to guess I would think it was a little bit of a red herring, just because she was Fed chair, so what's she going to do on the Fed?

I think ultimately, [Yellen] and Powell are both institutionalists and I think she will be careful about overstepping her bounds and being seen as entering the Fed's turf.

Bell: But I would imagine that actually, most of her focus will be elsewhere and I'm not sure it will have huge implications for... Her specifically being in that role will have huge implications for the Fed itself. But I'm mostly guessing. So I very well could be proven wrong.

Beckworth: I think you're right, in terms of she'll have a full plate and most of the plate will not include the Fed. I mean, she has the vaccine, got the virus beat. I mean, that is the biggest key to getting our economy going again, is bringing an end to this virus, getting those vaccines out there. And the Treasury is going to help fund a large part of that, as well as the relief, the other parts of the relief bill that Biden has proposed. So I think you're right, there'll be other issues where she'll play an important role in terms of the economy. And maybe the way to look at it is to the extent those policies do foster a robust recovery, her influence will be felt in how the Fed has to respond to that robust recovery we have at the end of the year.

Beckworth: So it's going to be, nonetheless, very interesting. And maybe another way to look at it also is, you won't have this disagreement between Secretary Mnuchin and Jay Powell we had it in the last year, with Janet Yellen. They're going to be much more together when it comes to making these important decisions. So I think all in all, it's going to be an exciting year to watch and a lot of interesting positions to be filled, the chair. So you mentioned the chair conversation will get started fairly soon?

Bell: Yeah. I think we'll start seeing stories in the spring about who's in the running, who's being considered and I'm sure, PredictIt will put up a betting market where all the gamblers can bet on who will become Fed chair. So yeah, I would imagine sometime this spring we'll start hearing more about.

Beckworth: Okay. So last question before we have to end the show, what is your estimated probability of Judy Shelton getting confirmed?

The Judy Shelton Nomination

Bell: Oh. There would have to be like, what's the probability of a meteor, a good sized meteor hitting the earth in the next six days? No, I think she doesn't have the votes anymore. And the Senate is not in session. So her nomination at long last is looking like it's going to expire. And she was first rumored right after Stephen Moore dropped out. So that was May 2019. And Trump tweeted her out on July 2019. So it's been a long road, but it looks like she will not be joining the Fed.

Beckworth: Yeah. Would you say her nomination process has been the longest of any in recent history?

Bell: I don't know. The Peter Diamond nomination at the beginning of the Obama term actually was out there for a long time.

Beckworth: Okay.

Bell: He had to be renominated in 2011. So if you put them together, his might be longer.

Beckworth: It's a very similar story, though. They both were out there for a long time, and finally he withdrew his name at some point. I think she's just going to have time run out on her.

Bell: Yep. He withdrew his name because he wasn't getting committee vote.

Beckworth: Yeah. Okay. Well, with that our time is up. Our guest today has been Sam Bell. Sam, thank you so much for coming on the show again.

Bell: Thank you so much, David.

Photo by Eric Baradat via Getty Images

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.