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.
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)