Moore and Cain Could Fix the Federal Reserve

(Bloomberg Opinion) -- Longtime observers of the U.S. Federal Reserve are aghast at President Donald Trump’s plan to place Stephen Moore and Herman Cain on the central bank’s Board of Governors. Many worry that Moore and Cain are unqualified and too political, thus risking the Fed’s independence. Such thinking ignores the fact that the Fed suffers from too much groupthink. In that aspect, Moore and Cain can change the central bank for the better.

To understand why Moore and Cain could be a breath of fresh air, we first need to detail just how broken the role of Fed Governor has become.

The policy making arm of the Fed, the Federal Open Market Committee, has 12 voting members when fully staffed. Seven are Governors appointed by the President, one of which is the Chairman. Five Governors are picked on a rotating basis from the 12 regional Federal Reserve Bank Presidents. While the voting regional Presidents and Governors are supposed to be equally independent policy makers, evidence suggests the role of Governor has largely become that of a symbolic figurehead.

Consider the history of voting patterns. From Jan. 28, 2004 to March 22, 2019, the Fed held 124 FOMC meetings. The five rotating regional Fed Presidents dissented from agreed upon policy 57 times. By contrast, the Governors dissented just once, when Mark Olson voted against the Sept. 20, 2005 interest-rate increase. Simply put, the Presidents are allowed the benefit of critical, independent thought, while the Governors largely toe the line of the Chairman.

This is further apparent in the staff each is allowed. Regional Fed banks have large staffs of economists and researchers. The Presidents marshal these resources to support independent thought and policy approaches. Governors have a staff of exactly one, although they can tap the Fed’s large resources in Washington.

The last time the Fed had a full compliment of seven voting Governors was July 2013. If the role was considered important to policy outcome, Washington would certainly set a higher priority in filling vacant seats.

Even the Governors themselves have at times put a low priority on their role. In 2014, Jeremy Stein announced he was going to leave the Fed and return to the economics department at Harvard in order to preserve his tenure there. In May 2008, as the Fed was dealing with the fallout from Bear Stearns, Frederic Mishkin announced his resignation. Part of the reason he left was that he wanted to update his economics textbook and resume his teaching duties at Columbia. In a similar vein, Randall Kroszner announced his resignation in January 2009, just a few days after Warren Buffett said the U.S. economy was experiencing an “economic Pearl Harbor” and the stock market was in free-fall. A new job in the University of Chicago’s economic department was the culprit in Kroszner’s case.

The problem is that the job of Fed Governor is not always viewed as having a serious effect on policy. Many consider it a reward given to leaders in academia who will ultimately back the Fed chairman. If they have an actual difference of opinion, they typically air their grievances behind closed doors. But at the end of the day, they are expected to vote with the Chairman. Since 2004 the Governors have voted with the Chairman 649 to 1!

This practice desperately needs to end. Appointing Moore and Cain would be a step in the right direction. They are true outsiders but able to take on the role of policy maker. Moore is an accomplished economics policy analyst. Cain was a successful businessman and former Chairman of the Kansas City Fed. Their backgrounds suggest they can bring unique views, which the Fed needs, and a strong streak of independence, which the Governors do not currently exhibit.

The idea that they are too political is a partisan argument not consistently applied. We do not recall the same thing being said when President Barack Obama was considering Larry Summers, the former Clinton administration Treasury Secretary for the job of Fed Chairman. Nor was their serious pushback when current Fed Governor Lael Brainard was writing checks to Hillary Clinton’s campaign and rumored to be her pick as Treasury Secretary. Or in 1997, when President Bill Clinton nominated Alice Rivlin, his director of the Office of Management & Budget.

The idea to insulate the Fed from politics by turning over the decision making to the Fed staff is the wrong way to do it.  But this seems to be what Yale University Professor Andrew Metrick, an expert on the Federal Reserve system, said last week:

The Fed staff is outstanding, and a governor that can synthesize the information given by staff and generally be “data-driven” in their decision-making does not need a PhD in economics to do the job well.  

Policymaking positions should help determine policy, not act as a rubber stamp for the staff or Chairman. They should hold divergent views, come from different backgrounds and be ready to explain themselves. Policy makers should be given the resources to flesh out their ideas. If confirmed, Moore and Cain would only be two of 12 FOMC votes. Their unique perspectives could make the Fed a stronger institution.

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jim Bianco is the President and founder of Bianco Research, a provider of data-driven insights into the global economy and financial markets. He may have a stake in the areas he writes about.

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