Dear Jay: High-Powered Advice for the Incoming Fed Chairman
Here’s what some of the economists and former policy makers have to say to Powell.
(Bloomberg) -- As Jerome “Jay” Powell prepares to ascend to the top spot at the Federal Reserve, he doesn’t lack for advice from prominent economists and former policy makers. Here’s what some of them have been saying:
Alan Blinder
Princeton University professor, former Fed vice chairman
“What I would do if I ran the world would be to make the inflation target a range of 1-1/2 to 2-1/2 percent. That’s still 2. You’re not retreating from 2. You’re not losing your credibility. But what you’re telling people is that the central bank has a limited ability to control anything, including the inflation rate, with precision.”
Martin Feldstein
Harvard University professor, former head of the National Bureau of Economic Research
“They should have started a few years ago normalizing policy, raising interest rates. And the price we’re paying for they’re not doing that is that we have a very fragile financial sector with asset prices way out of line with historic norms… (There should be) a shift in focus to include financial stability as a key determinant of what the Fed is trying to do with its monetary policy.”
Kristin Forbes
Massachusetts Institute of Technology professor, former Bank of England policy maker
“I would actually put a priority on thinking more about macro prudential policy and how it can be used to address financial stability concerns. That gets very complicated — especially in the U.S. where it involves a lot of different agencies. But if there is a way to make that process more efficient and more effective, that would be a priority. I’d start by looking at cross country evidence… There might be some tools that have worked pretty well in other countries that we would want to take a look at in the U.S.”
Austan Goolsbee
University of Chicago professor, former chief White House economist
“The Fed needs to be careful not to get too far in front of its skis in following an approach that’s different than every other central bank in the world. If they’re debating how far should we tighten when everyone else in the world is saying, ‘Let’s not tighten or let’s even loosen,’ the U.S. has got to be at last a little circumspect about whether we are truly out of the woods and whether growth is truly well-established such that you might expect to see inflation…I still have some doubts.”
Laurence Meyer
Former Fed governor who now heads his own consulting company
“I would have better communication about the meaning of the symmetric inflation objective…It has this hint that you want to be above 2 percent late in the cycle. Hammer that message out…. Explain how it’s not only consistent with an inflation objective, in some sense it’s a stronger price level stability story because inflation has a better chance of averaging 2 percent through the cycle.”
Frederic Mishkin
Columbia University professor, former Fed governor
“The Fed and other central banks should commit to an average inflation rate of 2 percent. So they still stick with the 2 percent number… But they do it over a fixed period of years, say five years. It could be over a business cycle… However, it’s extremely important that when you do this you make it very clear that what you’re really shooting for is a 2 percent long run target so you keep on anchoring expectations.”
Athanasios Orphanides
MIT professor, former European Central Bank policy maker
“I’m very much in favor of (Stanford University professor) John Taylor’s proposal for the Fed coming up on its own with a simple rule that would make its policy framework even more transparent. The excuses that I’ve been hearing from people inside the Fed for the last few years for not moving in that direction aren’t really credible and complicate any chair’s job going forward.”
Charles Plosser
Former Philadelphia Fed president
“They need to settle on an operating regime and on what they’re going to do with the balance sheet and they need to communicate that to the public… My preference would be that they would shrink the balance sheet so that they would get the (federal) funds rate target just above the IOER (the interest rate on excess reserves), not below it. That would be like the old system, kind of a corridor system… (If they don’t sharply reduce the balance sheet), Congress is going to use it. It already has. It raided the Fed’s balance sheet to fund the transportation bill.”
Adam Posen
President of the Peterson Institute for International Economics, former BOE policy maker
“This is a time when the Fed being behind the curve on responding to inflation is a good thing, with very few costs… There will be pressure on you to hike rates before wage inflation goes up, to tighten financial conditions before the next bubble emerges, to show your hawkish credibility, and, as a new CEO, to establish a new targeting regime. Resist all of these pressures… The Fed and the U.S. economy are in a sweet spot in a balanced strong global recovery. Enjoy it. Convey to everyone there is nothing to panic about by standing pat.”
Lawrence Summers
Harvard University professor, former Treasury secretary
“There’s a problem out there… which should be the preoccupation of the next Fed chair… The core strategy of the industrial world in responding to recessions for the last 40 years has been rate cuts by central banks of 500 basis points. There’s going to be nothing like that level of room the next time… How are we going to respond to that needs to be a great concern. That seems to me to be a reason to err on the side of expansion rather than contraction, particularly when you haven’t yet achieved a 2 percent inflation target.”
Photographs: Getty Images
--With assistance from Christopher Condon and Alister Bull
To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net.
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