The Fed’s Own Economists Challenge Interest Rate Folly

Today on TAP: Biden should appoint a prominent dissenter to the open post of Fed vice chair.

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Minutes of the most recent Federal Reserve meeting show that all members of the policy-setting Federal Open Market Committee agreed to keep strangling the economy with still more quarter-point rate hikes later this year, and some even wanted half-point hikes. Maybe they should read this study by the Fed’s own staff economists, which found that the Fed’s inflation target of 2 percent is impossible to reach without a deep recession.

The study, by Randal Verbrugge and Saeed Zaman of the Cleveland Fed, found that, using the Fed’s own projections, inflation would still be at 2.75 percent by the end of 2025—moderate by historic standards—and reducing it all the way to 2.0 percent would require an unemployment rate of 7.4 percent, more than double the current rate.

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President Biden has an opportunity to alter the Fed’s folly by naming a prominent dissenter as Fed vice chair. He created that opening when he moved Lael Brainard from the Fed to the White House to head the National Economic Council. It’s only one vote, but having a powerful voice to challenge the Fed’s conventional wisdom on inflation and interest rates could make a constructive difference.

Fat chance. News leaks suggest that the White House is looking at the usual suspects, and worse. Two of the top contenders according to The Wall Street Journal and Politico, Karen Dynan and Janice Eberly, served during the Obama era as chief economist at the Treasury, the home of utter orthodoxy on matters financial. This suggests the continuing and unfortunate influence of Treasury Secretary Janet Yellen, formerly chair of the Fed, who sometimes behaves as if she is running both institutions.

Another leak, this one to Bloomberg, suggests that Austan Goolsbee is also under consideration. Goolsbee, a centrist economist of no particular distinction, was a loyal member of the neoliberal Obama economic team led by Larry Summers. He now serves as president of the Chicago Fed, and has conventional views on inflation.

You have to wonder if Biden has personally focused on this key appointment or if his conservative advisers are leading him down this foolish path. When Biden was considering reappointing Jay Powell to chair the Fed, his views were carefully vetted. Powell feigned monetary dovishness, and Biden gave him the job—a disastrous mistake.

The candidates for vice chair should be vetted at least as carefully. Appointment of a dissenter would usefully break the Fed norm of iron consensus, and maybe even free the economy from a needless recession—on the eve of Biden’s re-election campaign.

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