Modern central banks keep attempting to manipulate prices to a different and “better” outcome than the market would provide, but what does this achieve?
There’s some historical elegance to the fact that the Fed’s annual symposium in Jackson Hole, Wyoming, is roughly as old as the modern Fed itself. The symposium, hosted by the Federal Reserve Bank of Kansas City, started in 1978.
Even the moderately well-informed will take issue with my history—the Fed was founded legislatively in 1913, after all, and took its current legal form in 1935. But the fact is the Federal Reserve didn’t become the juggernaut it is today, in perception and in fact, until much later.
In the 1970s, inflation was seen as the province of politicians and slogans, its remedy in the form of moral suasion. The Fed’s leadership at that time was at its historic nadir. President Nixon’s obsequious Fed Chair had just stepped down and President Carter’s replacement proved himself in well over his head. Arising like an Olympian figure came Carter’s next appointee, Paul Volcker, the technocratic central banker credited with breaking inflation’s back. I mark Volcker’s rise—including the intellectual apparatus then developing in macroeconomics—as the beginning of the modern Fed. Volcker put the Fed on the map as, in his words, “the only game in town” when it came to fighting inflation. He also successfully pushed the view that monetary policy, unlike everything else in Washington, was the purview of the experts. Politics, ideology, value judgments—these played no role in formulating Fed policy.
The confab in Jackson Hole, then, dates to the time of Volcker. (Indeed rumor has it that the Kansas City Fed moved the symposium there because Paul Volcker is an avid fisherman and they wanted to land him as a keynote speaker. The rest, as they say, is history.) In the shadow of the Tetons, the best thinkers and tinkerers of central banking officialdom began holding this gathering to refine their craft, discuss economics and the technical side of central banking, and mull over papers written largely for economists and central bankers.
There’s much to be said for the purely technical conception of central banking that Volcker popularized. Efforts to reason from first principles about the issues that central bankers must decide—such as the appropriate level of inflation, the correlation or lack of correlation between unemployment and inflation, or whether interest rates should be pushed into negative territory—are not very often fruitful. Experts have much to say about these questions, and expertise is not merely a dodge by bureaucrats bent on stealing sovereignty from the people.
But it is also easy to overstate this conception, as partisans on the Left and Right have long done. Central bankers, and the academic economists engaged with them, are not merely technocratic automatons. Theirs is a much more value-laden, ideological, and even political enterprise. This year’s conference provides two nicely symmetrical examples—one on the Left, one on the Right—of the erroneous arguments about technocracy and the need for politics to stay divorced from central banking.
First, Esther George, the president of the Kansas City Fed—an inflation hawk, that is, someone who focuses more on the Fed’s anti-inflationary mandate than its anti-unemployment one—invited prominent activists from the Fed Up! campaign to discuss the issues that matter to them. President George was joined by Fed Vice Chair Stanley Fischer and several other colleagues from the Federal Open Market Committee.
The Fed Up! activists are associated with the Left. By their account, they want a Federal Reserve that is “hearing from working families and the public, not just business executives” and that will “commit[ted] to building an economy with genuine full employment, instead of being satisfied with the current levels of un- and underemployment.”
This isn’t the first time Fed officials have met with activists, and in fact the Federal Reserve Act aims for the Fed’s governance to give “consideration to the interests of agriculture, commerce, industry, services, labor and consumers.” Even so, not everyone looked upon this quintessentially political meeting with forbearance. The editorial in the Wall Street Journal carried the following headline: “The Federal Reserve’s Politicians: Interest Groups Now Lobby the Central Bank as If It’s a Legislature.”
Many on the Right are horrified by what they see as the new politicization of the Fed. Activists should meet with their members of Congress, not with central bankers, they complain. What could activists tell technocrats about monetary policy, anyway?
This view of the monetary policymaking process is too narrow and reflects a lack of understanding about how the Fed is structured. This is the same central bank that for over 100 years has held multiple meetings a month with its dozen of private sector boards of directors, and these boards are nothing if not special interest groups. It holds meetings with the public constantly. Follow the Twitter feed of any current Federal Reserve Bank president and you’ll see what I mean. (Minneapolis Fed President Neel Kashkari is particularly active.) Interacting with representatives of special interests is what the Fed does. That George and others met with activists isn’t remarkable. Is it only news because the representatives in this case aren’t bankers?
In other words, the Fed has always been political. Pretending otherwise only promotes misunderstanding of its unusual power and the many ways that central bankers within the Fed use that power.
The second example is much broader, and leads us to consider what we even mean when we talk about “central banking.” I find the term archaic. While the financial stability aspect of central banks is as important as ever, they are not now primarily banks at the center. What they are is, in an important sense, up for grabs.
The conference itself shows a Federal Reserve at something of an intellectual crossroads. The model of the Olympian Paul Volcker—wrestling inflation to the ground despite the predicted and predictable rise in unemployment that occurred in response—looks very much like the old way of doing business. Consider these questions to which we used to know the answers: Will chronically low interest rates bring on a tsunami of inflation? Does our huge upswing in middleclass income suggest that the economy has finally recovered from recession? Is the historic tradeoff between inflation and unemployment stable? Was it ever? And who controls interest rates, anyway?
No expert consensus exists on any of these questions. We have a multitude of opinions, from experts and laymen alike. It is no surprise that the Fed is currently divided on even the question of whether we should, with unemployment below 5 percent, even raise interest rates from 0.25 percent to 0.50 percent. How will this divide be bridged? How will these old questions that have arisen anew get answered? In a word: politics. Just as it has always been.
Earlier this week on CNBC, Republican presidential candidate Donald Trump seemed to say something similar to my argument about a political Fed. He howled that Janet Yellen and the Fed are keeping interest rates “artificially low to get Obama retired. It is a very serious problem and I think it is very political. I think she is very political and to a certain extent, I think she should be ashamed of herself.”
Put aside for a moment that the Twenty-Second Amendment is what is responsible for President Obama’s retirement, not the Fed, and that asserting a relationship between the Fed and the President’s exit from the White House is confusing anyway. The issue Trump semi-coherently plants before us is one we’ve heard (and frankly seen answered) before. To put it bluntly: Is Janet Yellen’s Fed trying to throw the election in favor of his opponent, Hillary Clinton?
There is zero evidence for this. There is a great deal of evidence that, whatever the Fed’s central bankers think of the presidential contest, they’re focused on matters other than Trump versus Clinton. Not for the first time, and surely not for the last, Mr. Trump is making broad accusations that lack corroboration because they reinforce a narrative that serves his purposes (the narrative being that the government’s official statistics are lies and that the actual economy is in the dumps, all evidence to the contrary notwithstanding). As Larry Summers, himself no fawning supporter of recent Fed policy, put it in an interview: “Trump is talking nonsense. Janet Yellen is the least political person in Washington.”
On the other hand, where the former Treasury Secretary goes off course is in his overly broad use of the term “ political.” Let’s be clear that Yellen is, while no partisan, still a political actor within a political system. While there is no evidence that she and the Fed’s other central bankers are using their considerable authority to sway the election toward the Democratic candidate, there is ample evidence that technocratic expertise will not be enough to bridge the divide between those who take a classic view of the perennial questions the Fed faces, and those who are less certain that the old rules still apply.
To answer these questions, the Fed’s central bankers will rely on expertise, to be sure. But they will also rely on their own ideologies, and the process by which they will forge a new consensus and defend it against criticism is inevitably and appropriately political. The point bears emphasis: It isn’t that they are playing partisan politics by another name; it is to say that they are human within an institution that humans built. The central bankers have a set of experiences and expertise, a worldview and set of values, that allow them to look at an uncertain world and draw conclusions from those uncertainties.
Part of that worldview is informed by considerable expertise, and Janet Yellen is, in my view, the most experienced and expert Fed Chair in its 100-plus year history. Part of that worldview, too, is informed by their life experiences, what kinds of arguments they find persuasive, what kinds of evidence they consider valid.
The process by which the Federal Reserve resolves the current disagreements is a political process. Yellen seeks input from her colleagues in shaping the common ground within which they will set Fed policy. It is not a political process in the sense of trying to punish one’s partisan enemies and reward one’s partisan friends. But by the same token it isn’t as rigidly technical as a group of astrophysicists setting the trajectory of rockets to the moon using the principles of physics and mechanical engineering.
So what did they actually do at this year’s symposium nestled amidst those jagged Wyoming mountains?
One of the important topics discussed was what Yellen called the “daunting new challenges for central banks around the world” and the menu of “innovations in the design, implementation, and communication of monetary policy” that followed the global financial crisis of late 2007 to 2009 and the deep recession that followed it. Learning these lessons in order to set the future course of the Federal Reserve involves questions of technocratic politics. They will never end.
Regarding some of the problems, the technocratic apparatus that surrounds central banks is robust enough to command consensus among experts as to the correct policy—the technical, nitty-gritty process of clearing checks in a world without paper, for example. But for the larger matters, that apparatus will not be sufficient. The consensus among the technocrats will break down but the time for making a decision will arrive.
What fills that gap between the wisdom gained from technical expertise and a decision that is bound to meet with dissent from some of the experts is going to depend on the decision-makers’ values and worldview. Whose vision will carry the day will come at the end of an inherently political, although not a particularly artisan, process. That is the future for the Federal Reserve, just as it is the future for the American electorate.