Financial markets are anxious to see when and how quickly the Fed will tighten and raise interest rates. Investors will win or lose billions of dollars on this bet.
For the rest of us, getting this job right – like President Volcker and (during his first two terms) Greenspan – is crucial to creating a climate of decent prosperity in which many jobs are created. During the Great Moderation, 39 million jobs were created. We haven’t seen anything like it since.
Getting this job right is crucial for economic mobility – raises, bonuses, and promotions – to enable us workers to climb the ladder to decent wealth. So when to raise interest rates is much less significant than the fundamental issue.
Job creation has been feeble for over a decade. Economic mobility is also feeble. The left is widely known for calling for a longer easing of monetary policy – keeping interest rates low. The right is critical of the Fed’s “zero interest rate policy.” But true the tug-of-war is over over whether the Fed should follow monetary rules or exercise discretion; and, if any rule is preferred, which rule?
Yellen campaigned to show her empathy for workers. Lesser known: This empathy is shared by many conservatives and libertarians. I, among others, find Yellen’s novel openness to rank-and-file workers and activists a refreshing change of tone from the previously hermetically sealed “Temple.” There are several issues on which I agree with Senator Sherrod Brown. This is one of them. As Senator Brown said Policy: :
“I love the fact that Chairwoman Yellen and the three Fed governors actually held public meetings,” said Sen. Sherrod Brown of Ohio, an outspoken member of the liberal wing of Senate Democrats, who praised Yellen and her colleagues for their recent meetings with progressive activists. “I want to set a different tone where you listen to the public and people who have lost their jobs, listening to people whose life savings have evaporated….
Yellen’s descent from the Temple Mount to ordinary people on a plane is a noticeable change. It fits well, at least in style and perhaps in content, with the new populist spirit prevailing in the country. However, it is important that it is substantive and not just cosmetic. And substantive means intellectual openness to diversity of views.
The right is not the party of Ebenezer Scrooge. It’s all right when it comes to job creation and a rising tide lifts all boats. But Yellen has so far only aligned herself with the left. During her freshman year, Yellen visited a trade school and wore a welding mask (a truly great photo op); visited a low-income neighborhood before speaking widely at the Boston Fed conference, where she advocated for a social safety net and social services (which mysteriously did not involve monetary policy); met with President Obama on the eve of the 2014 election; and recently had an unprecedented encounter with what Bloomberg.com called “work and community organizers.”
I assume that Janet Yellen addresses the social democratic left because it represents her native intellectual milieu. They speak her language. Many progressives simply find a suitable foreigner, alien to our language. (Note to Yellen: If all I knew about my team was what I had read from Paul Krugman, I too would despise myself. The mainstream media’s portrayal of the right is a grotesque caricature. We are not what they portray us to be. But they are skeptical about what to the effectiveness of central planning. And for good reason. Dr. Yellen? America is a center-right country.)
Soon we’ll stop guessing and find out whether Janet Yellen is actually open to diversity of views… or if it’s just a “charm campaign.” One of the leading monetary integrity groups (and the leading pro-gold standard group) on the center-right, American Principles in Action, for which I advise professionally, recently personally conveyed to the Fed a request for Ms. Yellen to meet with representatives of the law.
The lettersigned by 20 renowned personalities on the right, stated:
We hereby consent to a pending request from Steve Lonegan of American Principles in Action to meet with you, Vice Chairman Fischer, and others of your choosing to gather and exchange views with a delegation of center-right monetary policy thought leaders.
…
The left by no means has a monopoly on concern about unemployment and wage stagnation. To balance the meeting with a group composed of, as Bloomberg News describes, “trade union and community organizers” with one of the leading representatives of center-right experts, we would honor the principle of “diversity of views.” An unbiased view of achieving our common goal of job creation and economic mobility would facilitate steps towards realizing this common goal.
The letter is noteworthy and may herald a significant shift in discourse. “Money Quote”: “The left by no means has a monopoly on concerns about unemployment and wage stagnation.” This is a thematic development that Yellen should encourage. The difference between members of the humanitarian left and the humanitarian right is one of means, not ends.
Everyone agrees that money matters and that the Fed is the backbone of the global monetary system. The left believes that discretion is the recipe for a more equitable prosperity. The right believes that monetary rule will bring about greater equitable prosperity. Both can’t be right. However, this is an empirical, not doctrinal, issue and should be treated as such. It is not really a left vs. right issue.
In a way, it’s “Yellen vs. Volcker.” Let’s compare Ms. Yellen’s statement with former (and iconic author of The Great Moderation) Fed Chairman Paul Volcker, repeated in earlier column: :
Ms. Yellen [at hearing of the House Financial Services Committee chaired by Chairman Jeb Hensarling earlier this year]stated that “It would be a grave mistake for the Fed to commit to conducting monetary policy according to mathematical rules.” Let’s compare Madam Yellen’s protest with the recent protest speech Paul Volcker, in which he openly stated: “I think we can now agree that the lack of an official, rules-based and collectively managed monetary system has not been a great success. In fact, international financial crises appear to be at least as constant and more destructive in terms of hindering economic stability and growth. …Not a pretty picture.
Not all rules are mathematical. There may be room for agreement in Yellen’s statement.
There is no general rule. And a bad rule or poorly implemented rule can be worse than no rule at all. If a rule is to be preferred, which rule?
There are competing schools of thought. These include primarily the Taylor Rule, NGDP targeting, inflation targeting, commodity price targeting, and the gold standard. The latter was once mentioned by Paul Volcker, who was not a supporter of the gold standard himself say it in the foreword to Marjorie Deane and Robert Pringle Central Banks (Hamish Hamilton, 1994):
What is sobering is that the importance of central banks this century has coincided with a general trend towards more, not less, inflation. Generally speaking, if price stability is the ultimate goal, we did better with the 19th century gold standard and passive central banks, currency boards, and even “free banking.”
Which policy would be most likely optimal to promote equitable prosperity and price stability? Every regime has vocal supporters.
In fact, this is an open question.
So the safest route out of the uncharted territory we find ourselves in seems to be the proposed Brady-Cornyn Monetary Commission introduced in 113.vol Congress. Apparently it will definitely be reintroduced in 114vol.
The proposed commission, widely praised in the financial media, is intended to be strictly bipartisan and scrupulously empirical. Its task is to make an objective assessment of the real effects of the various policies currently proposed. While many commissions are intended to derail a case, a monetary commission would be very appropriate. Monetary policy is convoluted and effective and, as usual, it does not lend itself to political towel thrashing.
The proposed commission is not at all hostile to the Fed. Fed chairman is appointed ex officio Commissioner to ensure that the Monetary Authority has a fair voice in the review process. The Secretary of the Treasury may appoint ex officio the commissioner too.
Policy defined Yellen is “the hardest job in Washington.” This is certainly exact. By taking a step away from her crystal ball and connecting with the grassroots, Janet Yellen may have created a robust vigorous that could prove beneficial to progress. But only if he listens to all sides. Moreover, the Commission would provide a civil buffer against the sobering reality that as Policy reports: “Republican leaders and staffers have said in interviews that they plan to use their new dominance on both sides of Capitol Hill next year to bring the Fed under much greater scrutiny, including aggressive questioning….”
On the surface, this is a tug of war between raising and lowering interest rates. This is essentially an argument about whether the Fed should follow a rule or make it up as we go. If Yellen proves open to a diversity of viewpoints, and if the Fed blesses the Brady-Cornyn Monetary Committee’s legislation, 2015 could see the beginning of a move toward credit that is both affordable and plentiful and can rival the Great Moderation in job creation.
