- Bloomberg screengrab
- Federal Reserve Board nominee Marvin Goodfriend is a highly-qualified economist and experienced monetary policymaker formerly at the Richmond Fed.
- This could make him very influential in an understaffed Fed board that is currently short on economics expertise.
- Goodfriend has some tendencies that are hawkish on inflation and thus friendly to the rhetoric of conservative Republicans.
- On the other hand, Goodfriend has expressed support for more aggressive tools to fight future recessions, such as negative interest rates, which remain controversial.
If congressional Republicans critical of low interest rates think President Donald Trump’s appointment of Marvin Goodfriend to the Federal Reserve board gets them a reliably hawkish, strongly anti-inflation governor, they may be disappointed.
Goodfriend, an economist at Carnegie Mellon University, is an unimpeachable appointment, particularly given the lawyer-heavy composition of the thinly-staffed Fed board as it currently stands. He has extensive experience in monetary policy both as a scholar and a practitioner, having spent eight years as director of research and policy advisor at the Federal Reserve Bank of Richmond.
Fed board governors have a permanent vote on the Federal Open Market Committee, which sets interest rate policy, and are thus highly influential. Goodfriend’s economic expertise will likely make his views particularly respected within the committee, especially while he’s surrounded by officials like incoming Fed Chair Jerome Powell and Vice Chair for Supervision Randall Quarles, both lawyers by training.
The Fed’s board has seven members, but three seats will remain open even after Goodfriend steps in. Lael Brainard is the only other economist on the board.
Those vacancies, and the dearth of economists on the board, mean that Goodfriend could have an outsize impact on Fed decision making in the coming years. And his particular combination of views on monetary policy could make that impact very interesting to Fed-watchers.
Doesn’t like quantitative easing, but likes negative interest rates
While the Richmond Fed has a long history of hawkish officials, who tend to prioritize low inflation over full employment, Goodfriend’s intellectual background, and his extensive scholarship in monetary economics, makes it hard to peg his potential policy calls.
He was a skeptic of the Fed’s extensive quantitative easing (QE) program of bond buys, which ballooned the balance sheet to $4.5 trillion. But he has expressed an affinity for making it easier for interest rates to go negative – as some central banks around the world have tried – so that central banks are not constrained during recessions when official borrowing costs fall to zero, as they did in the US in December 2008.
Joseph Gagnon, a former Fed board economist now at the Peterson Institute for International Economics (where I used to work) describes Goodfriend as “open-minded and intelligent.” “He does not like QE but he does like negative rates,” Gagnon told Business Insider. “He has even suggested taxing currency to allow rates to go substantially negative. Among that crowd he is one of the best.”
In 2016, Goodfriend presented a paper at the Kansas City Fed’s annual Jackson Hole Symposium entitled “The Case for Unencumbering Interest Rate Policy at the Zero Bound.”
As the title suggests, Goodfriend argues for “unencumbering interest rate policy altogether so that negative nominal interest rates can be made freely available and fully effective as a realistic policy option in a future crisis,” citing the experiences of Switzerland, Sweden, and Japan.
The concept of negative interest rates, whereby lenders effectively must pay households and firms to borrow, remains controversial even in those countries.
But is also hawkish on inflation
At the same time, Goodfriend checks a few Republican boxes on the anti-inflation front, having delivered testimony in 2017 saying that the Fed needs a more credible commitment to its 2% target. He has even suggested the Fed should attempt to follow some kind of prescribed policy rule directly connecting interest rates to inflation and other economic data – a step that Chair Janet Yellen and others have strongly opposed.
“The Fed should include in the ‘Statement’ its intention to improve legislative oversight by presenting the FOMC’s independently chosen monetary policy decisions against a familiar Taylor-type reference rule for monetary policy,” he told the House Financial Services Committee in a statement that surely pleased many of the chamber’s conservatives.
The remarks are curious because of Goodfriend’s focus on the risk of high inflation at a time when the Fed has undershot its inflation goals for five years running.
“Goodfriend seems to fear upside risks to inflation more than downside and hence we view him as somewhat to the hawkish side of the committee,” UBS economists led by former Fed staffer Seth Carpenter wrote in a research note. “Nonetheless, his underlying academic concern is in inflation expectations and central bank credibility andhe would also want to adjust policy to avoid very low outcomes of inflation.”
The nominee still faces Senate confirmation, but is expected to sail through.