Congratulations are due to Jerome Powell on being nominated to be Chair of the Board of Governors of the Federal Reserve. At this point I know Jerome Powell only from news reports, though I was pleased to realize a few days ago that the locked-down Twitter account @jeromehpowell created in 2011 is following me, as well as several of my friends in the blogosphere. If he is reading this, let me say that I would be glad to craft a blog post on any topic he would like to hear my opinion on, and would be happy to do so while keeping his query confidential.
As top dog, Jerome Powell may reveal a strategic perspective that was hidden from view while he was just a member of the Board of Governors being a team player. That sort of thing does happen: my grandfather was a Mormon Church leader who faded into the background—until by longevity he became President of the Mormon Church and turned out to be one of the pivotal leaders of the Mormon Church in the 20th century, with a broad strategic vision no one expected.
But there is also an excellent chance that Jerome Powell, as someone who believes in consensus, and has come to respect the Fed's excellent permanent staff through his service so far, will continue to be guided in important measure by the Fed staff.
Given that possibility, it is more important than ever for the Fed's staff economists to step up their efforts to prepare for the next recession or other crisis, even though several more years are likely to intervene before that next recession or other crisis hits. The decline of the natural interest rate and inflation call for the development of new tools of monetary policy, beyond what were used during the Great Recession and its aftermath. (Anyone on the Fed staff who feels complacent about the future after the experience we have been through and the dangers that remain should wake up and smell the coffee!) And even if we had in place the key tools for dealing with future shocks—deep negative interest rates and vert high capital requirements—there are many other improvements that can be made to monetary policy.
I have laid out my views on the urgent research agenda for monetary policy in my paper "Next Generation Monetary Policy." In brief, the pluses and minuses of each of these possible dimensions of monetary policy need to be studied carefully, so that by the time of the next recession or other crisis, we know the virtues and vices of each:
- eliminating the zero lower bound or any effective lower bound on interest rates
- tripling the coefficients in the Taylor rule
- reducing the penalty for changing directions
- reducing the presumption against moving more than 25 basis points at any given meeting
- a more equal balance between worrying about the output gap and worrying about fluctuations in inflation
- focusing on a price index that gives a greater weight to durables
- adjusting for risk premia
- pushing for strict enough leverage limits for financial firms that interest rate policy is freed up to focus on issues other than financial stability.
- having a nominal anchor.
Many of these will be very good for the nation and the world, but have political ramifications as well. For the Fed staff, let me say there is a good chance Jerome Powell will not only listen to you, but will be good at running political interference for the Fed to make it feasible for the Fed to get away with doing the right thing.