What You Need to Know About Fed Nominee Marvin Goodfriend's Views
By David Harrison
Marvin Goodfriend, the Carnegie Mellon economist nominated by President Donald Trump for a seat on the Federal Reserve's board of governors, has a long and distinguished academic career likely to please Capitol Hill Republicans.
Shortly after the news of his nomination broke Wednesday evening, House Financial Services Committee Chairman Jeb Hensarling (R., Texas) praised Mr. Goodfriend, calling him "a highly respected researcher" and "an impeccable conservative."
Throughout his career, Mr. Goodfriend has focused on the central bank's need to ensure inflation stays low and steady over the long term, giving consumers and businesses the confidence they need. But he also has made clear he is just as worried about inflation undershooting the Fed's 2% target as he is about overshooting it.
As a result, he could end up as an enigmatic swing vote on monetary policy in the coming years, one who sides sometimes with the "hawks" who favor higher interest rates to prevent excessive inflation, and sometimes with the "doves" who prefer lower rates to help nudge inflation up to target.
He also has espoused views on asset purchases, negative rates and other matters that could clash with the Fed consensus.
Here are some of the key monetary policy arguments Mr. Goodfriend has made over the years:
Sometimes He's a Hawk
In a 2011 Wall Street Journal interview, Mr. Goodfriend expressed worry about letting inflation drift too high, which would force the Fed to raise rates rapidly and perhaps destabilize the economy. "Don't play catch-up," he advised. "Commit to making low inflation your priority." He called on officials to pledge to hold inflation to 2% over the medium term, calling it "an operational imperative for monetary policy."
"Historically, the Fed has been reluctant to move interest rates up pre-emptively against inflation at this stage of the business cycle," he said at a time when the unemployment rate was 9.4% and core inflation had drifted up to 1.6% on the year, while the Fed was committed to bringing down the jobless rate. The Fed's benchmark short-term interest rate was near zero then.
If inflation rises over the coming years, he could side with the more aggressive inflation fighters in calling for higher rates. That could put him at odds with colleagues such as Fed governor Lael Brainard and Chicago Fed President Charles Evans who have suggested letting inflation overshoot 2% for a time to compensate for years of undershooting.
Sometimes He's a Dove
Yet it would be a mistake to assume Mr. Goodfriend would reflexively push for higher rates. Some of his speeches over the past couple of years indicate he is just as worried about low inflation.
In a 2015 address, he noted that the Fed's success in battling high inflation in the 1970s and '80s had convinced the public that the central bank was willing and able to curb excessive price pressures. But the Fed had yet to prove its mettle in fighting persistently low inflation. To him, the risks are evenly weighted. In both cases, failure to meet the target could hurt the central bank's credibility, cause the public to alter its expectations of future price changes and harm the economy in the long run.
Back then, the Fed was on the cusp of raising its benchmark interest rate by a quarter percentage point for the first time in nearly a decade even though inflation was still shy of the 2% target. To Mr. Goodfriend, it was too soon.
"There are lessons from the 1990s in conjunction with the current shortfall of inflation below target that argue for waiting before tightening monetary policy very much, if at all, in the near term," he said. "There is good reason to be skeptical of arguments such as these that low inflation will revert to 2% of its own accord."
He Supports Negative Rates But Is Wary of Quantitative Easing
Many Fed officials have been reluctant to embrace pushing interest rates below zero to boost a sluggish economy, citing a variety of risks. Mr. Goodfriend, however, sees the move as an acceptable Fed tool.
Negative rates are "nothing more than the sensible application of monetary economics, progressing along a path that has increasingly unencumbered interest rate policy to sustain price stability and full employment," he said in a 2016 paper.
Central banks in the eurozone, Japan, Switzerland, Sweden and Denmark have all dropped rates below zero in recent years.
However, Mr. Goodfriend has reservations about Fed asset purchases as a monetary policy tool. Since the recession, the Fed has amassed holdings of $4.5 trillion, primarily through three rounds of "quantitative easing" that scooped up Treasury and mortgage-backed securities. Now, as the economy is improving, the central bank is slowly shrinking that portfolio.
To Mr. Goodfriend, bond-buying programs blur the line between fiscal and monetary policy through Treasury purchases and distort markets through the purchase of mortgage securities.
Balance-sheet moves "are poor substitutes for interest rate policy as general-purpose stabilization policies," he said in the 2016 paper.
That position could put him at odds with other Fed officials if another downturn prompts the central bank to consider reviving bond purchases.
He Has Suggested Taxing Cash Deposits
One of Mr. Goodfriend's more theoretical academic proposals involved placing a magnetic strip on bank notes, allowing the Fed to impose a tax on cash deposited in financial institutions. As he argued in a 2000 paper, taxing cash would make it easier for the Fed to pursue its monetary policy. In particular, it would allow policy makers to drop interest rates below zero without fearing that negative rates would lead people to convert their investments into cash. That, he argued, was "a reasonable way of dealing with the zero bound."
The idea wasn't universally well-received by lawmakers with privacy concerns. Former Rep. Ron Paul, a Texas Republican, denounced it as "a preposterous idea" in a 2000 congressional hearing and introduced a bill to prohibit taxing deposits "as a safeguard to protect our privacy and maintain confidence in the currency."
The topic could come up in Mr. Goodfriend's confirmation hearing, giving him an opportunity to expand on his cash-taxing idea.
He Supports More Congressional Oversight and a Monetary Policy Rule
Fed officials formally adopted their 2% inflation target in 2012. Mr. Goodfriend has said he would like Congress to establish the goal in law to make it more credible. While that could be a popular suggestion among Capitol Hill Republicans, it likely would be less warmly received by fellow Fed officials worried about giving up too much of the central bank's independence.
In testimony earlier this year before the House Financial Services Committee, Mr. Goodfriend called on the Fed " to strengthen the legislative oversight process to help enforce the systematic pursuit of monetary policy."
That would include measuring the Fed's actions against a mathematical formula for setting rates such as the Taylor rule, he said, a move that Hill Republicans have long supported and Fed officials opposed.
Write to David Harrison at email@example.com
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December 01, 2017 06:14 ET (11:14 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.