Goodfriend appointment advances Fed overhaul

06 Dec 2017

The reshaping of the leadership at the US Federal Reserve (Fed), the central bank of the world’s largest economy and hence the world’s most influential monetary authority, continues to progress, spurring financial markets into another round of ‘reading the tea leaves’ as they try and work out the future course of US interest-rate policy at a time when growth is robust and inflation stubbornly muted.

Goodfriend joins policymaker board at US Federal Reserve

In the latest development, Marvin Goodfriend, an economist and university professor, was nominated by the White House to the board of governors of the Federal Reserve System. This gives him a voice in the body that sets the direction of US monetary policy, which affects not only US economic developments, but in light of the size of the US economy, developments around the world as well.

Goodfriend will be joining the Federal Open Market Committee, which is made up of the seven board governors, four of 11 regional Reserve Bank presidents and the president of the Reserve Bank of New York. FOMC policy influences the availability and cost of money and credit to “help promote national economic goals”: maximum employment, stable prices (targeting inflation at a rate of 2% over the long run), and moderate long-term interest rates.

Fed overhaul continues apace

The appointment is one of a number of recent changes at the Fed that are being watched closely for clues as how the central bank will handle the unwinding of crisis measures taken after the 2008 Great Financial Crisis, but also concerning the likely course of action should growth in the US economy – currently at its fastest pace in three years – slow down and inflation accelerate.

President Trump, who advocates a business-friendly, pro-growth agenda including tax cuts, has already appointed a new Fed chair, Jerome Powell, as well as a new vice-chair in charge of supervision, Randal K. Quarles, but there are still four open seats of the Fed’s board. By the time all the changes are made next year, six of the seven board governors will have been nominated by the Trump administration. So major personnel changes are underway, leaving ample scope to put a stamp on policymaking at the independent central bank.

Reading the tea leaves

Financial markets assess these and future nominations in an effort to divine how the composition of the Federal Open Markets Committee (FOMC) will influence policymaking, in other words, trying to determine who are the policy hawks – typically concerned about risks to the economy such as runaway inflation and the need to prevent it early on – and who the doves – usually central bankers keen on issues such as keeping unemployment low.

Goodfriend seen in the hawkish camp

Turning to Goodfriend, he appears to be in the hawkish camp. He is on record as saying that with its current stance, the Fed risked not doing enough to avoid a significant rise in inflation to well above the 2% target. Such a position and the policy measures it would entail – a less gradual increase in US interest rates than the Fed has been advocating so far – could increase the risk of tighter monetary policy choking off growth and ultimately pushing the economy into recession.

And how would he likely respond in a future recession? Goodfriend has made the case for negative interest rates, which would take US interest rates to levels so far seen only outside of the US and mark a more aggressive approach to dealing with a downturn that than taken by current Fed leaders. He is also sceptical of using quantitative easing under which the central bank buys assets (mainly bonds) in large quantities to drive interest rates down and thus support the economy. That view runs counter to the post-crisis – and now proven – approach adopted by current Fed chair Janet Yellen.

FOMC composition and handling a future downturn

As said, Goodfriend’s is one of a number of upcoming changes at the Fed and it might well be that while he was a policy critics on the outside, his views change once he is inside the central bank and the challenges of actually setting interest-rate policy become more apparent.

If, however, his nomination marks the start of a series of appointments of like-minded officials, financial markets might need to re-examine their scenarios for how they expect the Fed to manage interest rates (and the supply of credit) in the current, rosy ‘Goldilocks’ economy and also in the case that the good times look about to end and fresh support for growth and employment are needed.

2017 FOMC Members at the US Federal Reserve
• Janet L. Yellen, Board of Governors, Chair – term as chair ends; resigned from board
• William C. Dudley, New York, Vice Chairman – resigned
• Lael Brainard, Board of Governors
• Charles L. Evans, Chicago (+)
• Patrick Harker, Philadelphia (-)
• Robert S. Kaplan, Dallas (-)
• Neel Kashkari, Minneapolis (-)
• Jerome H. Powell, Board of Governors – taking over as Fed chair in Feb 2018
• Randal K. Quarles, Board of Governors – 2017 appointee

Alternate Members
• Raphael W. Bostic, Atlanta (+)
• Loretta J. Mester, Cleveland (+)
• Mark L. Mullinix, First Vice President, Richmond (+)
• Michael Strine, First Vice President, New York (+)
• John C. Williams, San Francisco (+)

(+) also a committee member in 2018; (-) not returning in 2018, places being taken by Boston, St Louis, Kansas City; list include non-voting members who attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options; source: