Trump's Golden Opportunity to Redirect the Fed

COMMENTARY Monetary Policy

Trump's Golden Opportunity to Redirect the Fed

Sep 20th, 2017 5 min read
COMMENTARY BY
Norbert J. Michel, Ph.D.

Director, Center for Data Analysis

Norbert Michel studies and writes about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
When it comes to the Fed, this sort of talk makes many people – especially moderate politicians – a bit nervous. iStock

Key Takeaways

It is entirely possible that President Trump could appoint five of the seven Board members, including the Chair, during a single term in office.

The notion that the Fed can easily control the economy through monetary policy is dead wrong.

But a slate of new Board members can get the Fed on the right track. And there is no shortage of well-known scholars who can help President Trump do just that.

When President Trump took office, there were three vacancies on the Federal Reserve’s Board of Governors. Earlier this month, Fed Vice Chairman Stanley Fischer announced his resignation, effective “on or around October 13, 2017.”

And even though Fed Chair Janet Yellen’s term as Fed Chair expires February 3, 2018, were she to resign then, it would not be unusual. Former heads of the board have resigned rather than remain in a diminished role.

So it is entirely possible that President Trump could appoint five of the seven Board members, including the Chair, during a single term in office. It presents a rare chance to immediately shape Federal Reserve policy in a way that most presidents have not enjoyed.

This opportunity is the perfect fit for a president whose most popular themes include transferring power from Washington, D.C., and giving it back to you, the American People.

When it comes to the Fed, this sort of talk makes many people – especially moderate politicians – a bit nervous. Money is the means of payment for virtually all goods and services, so caution is certainly in order when dealing with the Fed. But for some perspective, here’s what former Fed Chair Ben Bernanke had to say back in 2003 (HT to Scott Sumner):

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it.

The absence of a clear and straightforward measure of monetary ease or tightness is a major problem in practice. How can we know, for example, whether policy is “neutral” or excessively “activist”?...

Nor are there other instruments of monetary policy whose behavior can be used unambiguously to judge this issue….

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

The notion that the Fed can easily control the economy through monetary policy is dead wrong. Even a former Fed Chair openly admits it is very difficult for central banks to tell whether they’ve created too much or too little money, and acknowledges that the policy measures traditionally used do not do the job.

Despite the fact that decades of monetary policy experiments have failed to solve this problem, to rid the U.S. of financial crises, or to appreciably tame the business cycle, politicians remain content to give the Federal Reserve more power and authority. (Dodd-Frank is only the latest example.)

This tendency has made the modern Fed very different from the National Reserve Association that was originally envisioned, and it continues to give an elite few more control over economic decisions that affect everyone else’s well-being. Staying on this path is the polar opposite of giving power back to the American people.

But a slate of new Board members can get the Fed on the right track. And there is no shortage of well-known scholars who can help President Trump do just that.

Ideal candidates for Board membership are those who believe:

If President Trump really wants to transfer power away from Washington and give it back to the American people, he will infuse the Fed’s Board of Governors with a major dose of new thinking. If the President uses this opportunity wisely, he can ensure that the Board puts less faith in the Fed’s ability to fine-tune the economy, influence interest rates and inflation, tame business cycles, and ensure the safety and soundness of financial markets.

There is more than enough evidence to support shifting to this way of thinking, and there is no shortage of potential nominees who would agree.

https://www.forbes.com/sites/norbertmichel/2017/09/19/trumps-golden-opportunity-to-redirect-the-fed/2/#1e33b111c135 

This piece originally appeared in Forbes