What should be the requirements for the next vice-chair of the Federal Reserve? At present these are elementary, I believe, and each one points to the same person.
First, the job should be for a bona fide economist. Jay Powell is intelligent and capable by all accounts, and he has no doubt learned much from his five years on the Federal Reserve Board, but his lack of graduate training in the field represents a significant lacuna in his resume that needs to be compensated for in some way.
It is important that he be able to work closely with someone who knows the models the fed economists use and is thus able to alert him when too much faith is being put into their output. Janet Yellen’s refusal to believe the model’s inflation predictions led her to delay increasing interest rates and has proven to be prescient. It was a predicate for the solid growth we are enjoying currently, and cemented her status as one of the most capable Fed chairs in our country’s history.
Second, the vice chair should be someone who knows how the Federal Reserve’s bureaucracy works and—more importantly—what motivates its staff. The bank’s stature within the economics profession and its ability to pay top wages means it attracts the best and brightest graduate students to work for it. However, the staff overwhelmingly come from the same few schools and tend to hold the same preconceived notions about how the macro economy works. They invariably try to nudge their superiors to see the world as they see it—and that’s not always helpful to a fed chair. Someone who has been in their milieu but not of it and actually knows these actors would be of immense help to Jay Powell.
The vice chair would ideally be someone who knows what life is like outside of the large east and west coast cities and can thus recognize when there might be a distinction between the interests of main street and Wall Street, or when these distinctions are being overplayed. Jay Powell is no elitist but he is a lifetime denizen of the East Coast, and could use a right hand person who hails from another part of the country.
Finally, Powell and the White House need to consider the fact that there is a decent chance we will have a recession in the next four years. That in and of itself is not particularly vexing—the Republic has survived myriad downturns, of course—but the problem is that we are not in a great spot to mitigate such a downturn. For starters, our government is running a large budget deficit already, even though we are in the 9th year of an economic expansion and tax revenues have climbed steadily over that time. Combined with the fact that we have a gridlocked Congress and a tax reform plan that will take a few anti-recession tools (most notably bonus depreciation) off the table means that fiscal policy may be slow, small, and somewhat ineffective the next time we need it.
What’s more, the lowish interest rates at present means the Fed does not have too many conventional bullets—that is, interest rate reductions—in its holster to combat a downturn in the economy either. Should another recession occur in the next four years it will require some deft maneuvering by the Fed to dampen any slowdown and right the ship again, not unlike what it did with the various iterations of quantitative easing in 2008-2010.
Just as we were fortunate to have someone who spent his academic life studying the great depression helming the Fed during the financial crisis in Ben Bernanke, we had best have someone who has spent his life thinking about monetary policy in exceptional situations close to the chair should another recession hit.
These criteria point to one man: James Bullard, the president of the Federal Reserve Bank at St. Louis. He has been at the helm of the bank for a decade, and before that was a senior economist there the previous two decades.
He has spent his research career thinking precisely about what a central bank can do to stimulate the economy when interest rates are near zero. This rare expertise is why the bank took the almost unprecedented step of reaching into the ranks of its research staff to make him its president, a move that paid off for everyone. Bullard played a prominent role in the Fed’s extraordinary monetary responses in 2008-2010, and he also did yeoman’s work defending Bernanke’s actions both to skeptical politicians—who kept fearing inflation—and in the media.
He also knows the players on the Fed Board, its regional banks, and the senior professional staff on DC. He would need no time to get up to speed.
And he is a product of small towns in the Midwest, having grown up in rural Minnesota and attended St. Cloud State and Indiana University, where he was my student: fine institutions, to be sure, but not ones from where our nomenclatura typically hail. What’s more, he spends a lot of time in his current job traveling around Illinois, Kentucky, Missouri, Tennessee and Arkansas—the states in his Fed district—talking to businessmen to get a sense for the mood on the ground. It is something that few economists have any opportunity or ability to do these days.
A Fed Chair can talk to virtually anyone, on Wall Street or anywhere else: no one will turn down his phone call. However, the job’s stature means that he might not get unvarnished information from those he talks to, and he will be busy enough that cannot devote too much time to such deeds.
Far better would it be to have someone down the hall who has been having such conversations for decades, knows the institution and its biases, and also happens to be the man to see the next time the U.S. economy has a downturn.
Elmus Wicker is professor Emeritus of economics at Indiana University and author of Banking Panics of the Guilded Age (Cambridge Press).
