Specifically, there are six key questions to ask officials before we entrust them with managing the macroeconomy to ensure workers see healthy job opportunities and wage growth.
1. Does the nominee support the Fed’s dual mandate of maximum employment and stable prices?
The Fed’s dual mandate of maximum employment and stable prices is the most successful approach to monetary policy yet implemented. While deflation and accelerating inflation can have destabilizing macroeconomic effects and create costs that fall disproportionately on lower-income and less financially sophisticated households, central banks overly focused on price inflation have contributed to stagnation of long-term growth, which increases the likelihood of deflationary events. It is important that the Fed carefully weigh the short- and long-term employment effects of monetary policy decisions.
2. Does the nominee believe the Fed should define its price and employment goals clearly and publicly?
While the Fed has indicated that it has an inflation target of 2 percent, it has not explained why that target was chosen, or why it has undershot this target so much more often than it has overshot it. These issues need to be discussed publicly. The Fed has also not been clear about its employment goal. If the goal is to stay close to some estimate of the “natural” rate of unemployment, or if the employment goal is otherwise determined, then that goal should be explained and shared publicly.
3. Does the nominee see monetary policy as a key financial stability tool?
The Great Recession underscored that asset bubbles and other financial market distortions can create long-lasting havoc in the real economy. Because monetary policy has powerful effects on financial markets, contractionary policy is often seen as a key tool to counteract threats to financial stability—especially when regulators are too lax. However, monetary policy is a very blunt instrument, and the negative effects on output, employment, and wages make the costs of using this tool extremely high. Instead, the Fed, in collaboration with financial and market regulators such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), should use their Dodd-Frank authority to regulate financial institutions and activities to prevent financial instability to avoid the very high costs of contractionary monetary policy. Any nominee must take a public stand on this trade-off.
4. Does the nominee believe the Fed’s operational independence should be maintained?
While Congress has the responsibility to set the mandate for the Fed and oversee its implementation of that mandate through reports and congressional hearings, the day-to-day execution of monetary policy should remain with the Fed alone. The decisions that the central bank must make are complex and based on a wide variety of empirical data that are difficult for even experienced experts to interpret. It is better to evaluate the central bank’s performance on the basis of longer-run outcomes than on decision-making over a shorter period of time. However, this does not mean excessive deference to the Fed. Any nominee should clarify how the Fed will maintain its independence from motivated outside influence, as well as how it will demonstrate to the public that it serves their interests first.
5. Does the nominee believe the Fed should limit its support for the shadow banking system?
The Fed has created a “reverse repo” facility, which essentially allows nonbank financial institutions, such as money market funds, to create short-term interest-bearing deposits with the Fed. While this practice helps to prevent short-term rates on open market repo borrowing and other short-term debt from falling dramatically below the interest rate on excess reserves earned by banks, it provides the shadow banking system with Fed support. This support does not come with the corresponding supervisory or regulatory requirements that apply to banks. While the Fed has said that the reverse repo facility is not permanent, the number of institutions with access to the facility has expanded over time, along with the maximum level of participation. Such extensions of Fed support for the shadow banking system need of be thoroughly discussed publicly.
6. Does the nominee support ongoing efforts to make regional Fed banks more diverse and more publicly accountable institutions?
Recognizing the position of growing importance the Fed system has come to occupy in economic policymaking also means recognizing that the role of the Fed’s Regional Reserve Banks in the U.S. economy has grown as well. These institutions are still governed with a focus on their role in regional banking and networks, and the result is a group of key decision-makers that are much less diverse than the institutions they regulate and the public of the regions that they serve. Reforming Reserve Bank governance to better reflect and serve the public must become a high-priority policy reform. However, if nominees believe the Fed system should not grow more diverse and be publicly accountable, they must defend the merits of this view publicly.
The Fed is not a flashy organization, and it’s difficult for most Americans to follow the obscure people who contribute to its policies. But the Fed is one of the most important institutions in the United States for fighting recessions—and for ensuring economic recoveries are broad-based and create real wage growth for all Americans. Fed nominations are rare, and as such, our elected officials must press nominees to be transparent, sharing with the public their plans and communicating their willingness to be accountable. If they cannot or are unwilling to do so, they should not join an institution whose primary function is to support the public interest.