April’s jobs report highlights the tremendous momentum the economy carries in 2019, with a strong uptick in job creation and a strong average hourly wage growth. The report also reminds as to the noise in economic data. The reported payroll survey’s April jobs gain is more than four times February’s, and while the payroll survey reported strong job gains, the more volatile household survey has reported net job losses in three of the past four months. On balance, and in light of other available data, the economy appears to be maintaining a strong and sustainable pace of growth. All we need to continue this progress is to avoid major unforced policy errors.
President Trump’s most recently proffered names to join the Federal Reserve Board, Herman Cain and Stephen Moore, proved highly controversial. Both have since withdrawn from consideration under significant bi-partisan Senate resistance. Their disengagement means the board remains short-staffed, which while not an emergency, is a concern given its importance. The White House should move with deliberation and dispatch toward finding suitable nominees, and then the U.S. Senate should evaluate them, in each case according to four criteria: service, character, independence, and ability.
Why exactly does this person want to become a Federal Reserve Board Governor? An obvious question, but one carrying additional weight for a Fed nominee. Fed Governors eventually become former Fed Governors, at which time the experience and knowledge gained have great market value in some circles. Of governors taking office since 1990, seven have left office in fewer than four years. Prospective governors should be driven by the intent of public service, not simply punching a ticket to cash in after a short stint.
As to the matter of character, neither the White House, the Senate, nor the nation need any guidance on this issue. We should not expect prospective public servants to be saints without past blemish, but a demonstrated upright character is obviously necessary for any public servant.
Much is made of the importance of central bank independence. Indeed, history is replete with examples of the troubles ensuing when central bank independence is severely challenged or lost. But neither is independence absolute. Nor should it be in a republic with respect to a public institution of such enormous power.
The Fed exists as a legislative creation. The president nominates a Fed Governor, implying the nominee and the president share some broad agreement of views. The Senate considers the nominee, at which time Congress can exert influence. And the Chairman and Vice-Chairman for Regulations are called to testify before Congress.
Will a nominee if confirmed exercise his or her own judgment, based on the facts and circumstances, their best understanding of the economy, and in light of the Fed’s congressionally established duel mandate? Will he or she do so independent of the president’s wishes, expressed or otherwise? If the appropriate responses are credibly given to the Senators’ questions in this regard, then Senators should move on to the final matter – ability.
One uncontested plus associated with Herman Cain and Stephen Moore was that neither were typical Fed nominees. Diversity of opinion on the Board is surely a virtue else there would be little point in having seven board governors. On the other hand, if diversity were all that mattered, then one imagines a New York City taxi driver and a San Francisco ear, nose, and throat specialist would offer real diversity.
The greater issue is whether a nominee has the experience and knowledge to contribute materially in the Fed’s work, in the development and execution of monetary policy, as guardian of financial market stability, as a primary regulator of financial market participants, or otherwise.
Having addressed the previous matters, here is where the Senate should focus its attention. What has the nominee asserted in the past and why? Can the nominee clearly and reasonably explain their beliefs about the economy and monetary policy today?
For example, the Federal Reserve has temporarily suspended its steady progression of raising the federal funds rate while working off the assets on its balance sheet accumulated earlier as part of quantitative easing. Some believe the Fed should continue its march, raising the funds rate until it hits neutral. Others question what a neutral rate would be in 2019. Some call for a 50 basis point cut in the funds rate. What does the nominee believe and why?
For all the firmly held and expressed opinions of Fed policy for and against, monetary policy is very much a trial and error business. One hopes the errors, however frequent, are small and quickly corrected. No one’s crystal ball or economic model is so perfected as to yield with certainty the correct answer for today and tomorrow.
The global economy and especially financial markets are constantly evolving. The instruments and effects of monetary policy are likewise evolving. It is said that macroeconomics, and certainly monetary policy, is an exercise in telling stories. What stories can the nominee tell about the state of the economy, of financial markets, and of correct monetary policy, and do the stories make sense?
Few Senators are monetary policy experts. In querying the nominee, Senators will have to form judgements based on their own understanding. But Senators should also listen carefully to the reactions of outside experts, filtering out those voices known to be more interested in scoring political points than in rendering an unbiased judgment.
Larry Kudlow, Director of the White House’s National Economic Council, has indicated they are reviewing possibly nominees. They should do so thoroughly and swiftly. Finding suitable nominees ready for prompt Senate consideration would eliminate a nagging uncertainty facing the economy and would represent one more step this White House could take to ensure a strong economy going forward.