Fed Up

The normally sensible Simon Johnson has a new editorial out today on the next head of the Federal Reserve. After discussing who (in Johnson’s opinion) the three leading candidates are (Yellen; current vice-Chair of the Fed; Tim Geithner, and Larry Summers, Johnson laments the fact that none of these candidates have said anything about what Johnson sees as the critical issue for the next decade of monetary policy:

How the Federal Reserve should view the financial sector, particularly the various potential causes of systemic risk. This is unfortunate, because the role of the central bank has changed considerably in recent decades, and how to deal with global megabanks will be central to the macroeconomic policy agenda going forward.

Johnson goes on to then declare that Richard Fisher is an ideal candidate to lead the Fed, because of his stated support for the Volker Rule that would break up big banks:

Richard Fisher, president of the Federal Reserve Bank of Dallas, has made clear his skepticism of our current financial system – he and Harvey Rosenblum have also made very sensible reform proposals. He would be the ideal candidate to become next Fed chair. Unfortunately, the political power of megabanks means Mr. Fisher is unlikely to be called upon.

While I agree with Johnson that systemic financial risk should certainly be something carefully watched (and perhaps regulated by) the Federal reserve, I think Johnson is sort of putting the cart before the horse here—to me, the critical issue for the next Chair of the Fed is the current unemployment crisis. If interest rates were currently at 10%, inflation was running below 2%, and unemployment was above 10%, there would be enormous political pressure on the Fed to ease monetary policy. Unfortunately, today unemployment remains elevated, inflation remains below target, and yet Richard Fisher has consistently called for a cessation of Quantitative Easing over the past 2 years, in spite of the fact that by both metrics for which the Fed is, by law, supposed to measure performance (price-stability and unemployment), current monetary policy is TOO TIGHT. Richard Fisher would be a terrible candidate for the next Chairman of the Federal Reserve. There are plenty of other candidates that are sufficiently aware of the problems associated with systemic risk in the financial sector that are not advocating for tighter monetary policy in the face of economic evidence and the stated legal mandates of the Federal Reserve.

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