Fed nominee Goodfriend, fan of negative
rates, could roil debate
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[January 23, 2018]
By Howard Schneider
WASHINGTON (Reuters) - Republicans on
Capitol Hill, who this week are to begin considering economist Marvin
Goodfriend for a Federal Reserve board seat, will find much they like in
his criticism of Fed bond buying, support for low inflation, and
agreement that Congress should put tighter limits on the central bank.
Dig deeper and the picture gets more complex, of an academic who has put
his heft behind controversial ideas like negative interest rates,
proposed taxing cash as a way to implement them, and, had he been in
command, might have delayed raising interest rates even longer than Fed
Chair Janet Yellen.
With views that are at once old school and provocative, former
colleagues and academic acquaintances say they expect Goodfriend to try
to reshape how the Fed operates, how it fights future crises, and how it
relates to Congress.
The last of those could prove particularly divisive given the many Fed
policymakers, including chair nominee Jerome Powell, who are skeptical
of politicians imposing new restrictions on them.
"I intend to draw on my academic and professional experience to promote
policies that would further increase transparency and accountability at
the Federal Reserve," Goodfriend said in prepared testimony for his
hearing that was released on Monday by the Senate Banking Committee.
"Marvin is going to be a counterweight to the more conventional thinking
coming out of the Federal Reserve establishment," said Vincent Reinhart,
chief economist at Standish Mellon Asset Management and a longtime
colleague from years when Reinhart worked as an economist at the Fed
board and Goodfriend at the Federal Reserve Bank of Richmond.
"He is coming from a different perspective. It will not exactly be
seamless."
The Senate Banking Committee on Tuesday is scheduled to hold a hearing
on Goodfriend's nomination by President Donald Trump to join the Fed
board, a seven-member group that is currently both shorthanded and in
the midst of a transition to new leadership.
Yellen's term as chair ends Feb. 3, and after she leaves office there
will be only three sitting governors - incoming chair nominee Jerome
Powell, Vice Chairman for Supervision Randall Quarles, and Governor Lael
Brainard.
The nomination of Powell, a Fed governor for five years who has backed
Yellen's approach to policy, was seen as a way for Trump to have it both
ways, naming his own Fed chair while keeping the stage set for a
continuation of Yellen's gradualist approach to raising rates.
AN INDEPENDENT STREAK
Goodfriend's nomination, by contrast, may bring an altogether different
set of ideas in the door, including some that have found support among
Republicans on Capitol Hill, who want clearer boundaries around what the
central bank does, but which have largely been resisted by the Fed
itself.
Though Goodfriend spent a quarter century as an insider at the Richmond
Fed, a stint broken only by two years on the Council of Economic
Advisers during the Reagan administration, his writings then and since
as a professor at Carnegie Mellon University have been highly critical.
He has argued for instance that the central bank shouldn't be involved
in private credit markets, by for example buying mortgage-backed
securities as it did during its "quantitative easing," and that Congress
should set explicit rules for future Fed securities purchases.
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The Federal Reserve headquarters in Washington September 16 2015.
REUTERS/Kevin Lamarque/File Photo
Yet, despite strong views about the value of low inflation, he is no
reflexive hawk, and in particular argues that the Fed has eroded its
credibility by not being more aggressive in ensuring inflation
climbed back to its 2 percent target.
"There is good reason to be skeptical of arguments...that low
inflation will revert to 2 percent of its own accord...The Fed
should wait before tightening monetary policy very much, if at all
in the near term," he wrote on the eve of the Fed's first
post-crisis interest rate hike in late 2015.
More than two years later inflation is still falling short.
"One the one hand he is rules-based - minimize credit distortions,
minimize the footprint," of the Fed in an effort to make policy more
predictable and presumably more successful, said George Mason
University economics professor David Beckworth.
"On the other hand he has been very clear that the Fed in some ways
has not been forceful enough."
That view may have particular bearing on a growing debate within the
Fed about inflation, pressed by people like San Francisco Fed
President John Williams who feel the central bank's fixed 2 percent
inflation target should be revisited.
Goodfriend has agreed in his writings that the Fed's consistent
undershoot on inflation has been a problem.
As a possible remedy he has written extensively about the possible
use of negative interest rates to free central banks from their
inability to cut rates below zero in what would amount to a sort of
tax on deposits.
In theory, that would let the Fed more effectively fight inflation
in a deep crisis and make unnecessary the sort of bond-buying and
other programs used to stimulate the economy when interest rates
reached zero and could go no lower.
In that situation the Fed could just keep ratcheting interest rates
lower, undermining the value of cash until people start spending it.
In practice it is a politically charged idea that current
policymakers largely have ruled out.
"The Fed has some breathing room to think about some major
issues...Marvin's work spans all of them," said Boston College
economics professor Peter Ireland.
But with some of his ideas, and negative rates in particular, "You
can't push it that hard. You'll get blowback right away."
(Reporting by Howard Schneider; Editing by Andrea Ricci)
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