A decade ago, the Federal Reserve, the European Central Bank and the Bank of England were all headed by men who had — at one time or another — studied or taught monetary economics at the Massachusetts Institute of Technology.
By the time the pandemic was upon us, none of the world’s three most powerful central bankers even held a doctorate in the dismal science. Anyone after confirmation that policymaking circles are no longer quite so dominated by people with the same background should take a look at last week’s nominations for the open seats on the Fed’s board of governors.
US president Joe Biden listed three picks that, if approved by lawmakers, would mark the first time women outnumber men on the policy-setting Federal Open Market Committee.
Philip Jefferson, a professor at Davidson College who has focused his research on poverty, would be the only male to make the cut. Lisa Cook, an economics professor at Michigan State University who has published research on wealth, gender and race inequality, would become the first African-American woman governor. Duke professor Sarah Bloom Raskin is — like chair Jay Powell and governor Michelle Bowman — a lawyer by training, leaving the legal profession only slightly outnumbered by the economics PhDs should she be approved.
Investors should not rip up their bets on the trajectory of US interest rates. Raskin, nominated for the vice-chair in supervision, would toughen rules and sharpen the Fed’s focus on greening the financial system. But any shift in monetary policy will be subtler.
“It isn’t that common that people who are openly dovish get appointed to central banks. And usually when they are, they feel enormous institutional pressure to change,” says Adam Posen, president of the Peterson Institute think-tank and a former rate-setter in the UK. “It’s the Thomas à Becket phenomenon — when people move from state to church, or from academia to the central bank, they change their behaviour to better reflect the institution they now represent.”
Powell and Lael Brainard, who could soon be confirmed as vice-chair for monetary policy, have already set out a clear path for 2022. “The March meeting is where I’d expect there to be a decision on whether or not to raise rates,” says Claudia Sahm, director of macroeconomic research at the Jain Family Institute and a former Fed economist. “The chances of having a whole new board around the table by then is basically zero.”
The nominees could aid the central bank in traversing the most difficult year it has had in a long time. “The messaging is going to be very important, explaining to families who are seeing their incomes squeezed that wage growth isn’t necessarily a good thing due to possible inflation is hard to do. These different backgrounds will help do that,” Sahm says. “They’re gonna make mistakes and we’re not gonna like all the things they do, but the FOMC will have a lot of really thoughtful, really technically skilled people.”
For an institution that has faced barbs from lawmakers on both sides of the aisle and, more recently, been engulfed in a scandal involving the trading activity of some of its most senior officials, the nominations offer a chance to show the Fed is capable of shifting with the times. And boy have they changed.
The triumvirate of Ben Bernanke, Mario Draghi and Mervyn King was the culmination of an era that began in the 1990s, when handing power to unelected technocrats to control inflation as they saw fit seemed the most foolproof way to produce economic and financial stability. As it turned out, the three ended up spending most of their time battling crises. A near-myopic focus on consumer prices had enabled financial risk-taking, while the gap between the richest 1 per cent of the population and the rest yawned.
Monetary policy cannot solve all of the economy’s problems, regardless of the composition of the FOMC. But a more diverse group could mitigate some of the damage caused by the hubris of earlier generations by having a better understanding of what matters to Main Street.
“The Fed is an independent agency that makes decisions which disproportionately affect economically disadvantaged people. So it needs a boost in legitimacy that comes from having broader representation,” says Posen. “The Powell Fed made a lot of progress, encouraging public discussion and constructively looking at broader measures of labour market participation, but to really do it credibly, it helps if you don’t have a committee that’s all white males from relatively privileged backgrounds.”