Michael Maiello's picture

    Hillary Clinton vs. The Fed

    This week Hillary Clinton quietly announced plans to overhaul the U.S. Federal Reserve System by removing bankers from the boards of directors of the regional Feds.  I think that more than anything this highlights how Clinton's knowledge of the government and its institutions will work to make her an effective agent for change once she's in the White House.

    This is some deep stuff.  Most of the public, including the interested public, understands how the U.S. Federal Reserve System works at its highest level -- the Chairperson and the governors debate and decide upon monetary policy. But when it comes to the regional feds in New York, Dallas, San Francisco, Cleveland and Philadelphia, the public is far less informed about what goes on and how policy is made.

    Head on over to Rolling Stone for my complete take.

    Dagblog is so rock and roll.



    "The announcement brings the Democratic presidential front-runner closer to the position of her rival, Sen. Bernie Sanders (I-Vt.). Sanders proposed barring financial executives from sitting on the boards of the 12 regional Federal Reserve banks in an op-ed in The New York Times in December."


    I've been very consistent here that Bernie's candidacy has made Hillary better and every time I say it, you ask me why I'd say such a thing.

    So, here you go.  He gave her a real run and she responded with some really good ideas, some of them from Bernie.

    That's awesome.  Congratulations.

    Great article, Michael.

    Clinton's initiative here is very encouraging for the reasons you so well describe.

    There is a quality to these reforms which is understandable to the average person whereas trying to describe the FOMC, QE, etc., is so difficult.

    But I have to ask you, does this mean that Clinton is not data dependent?

    At the top level, for what it's worth, I think the Fed has done a great job acting on the data it gathers.  Bernanke's reaction to the Financial Crisis was brilliant, if hindered by Federal outlays collapsing after the debt ceiling fight of 2011.  Monetary policy can only do so much if fiscal policy is at odds with it.  In any event, we are better off than we would have been had Bernanke not been so dovish and willing to risk QE on top of low interest rates.  Janet Yellen is a similar dove.  She hiked rates in December and promised four increases in 2016 but was wise enough, when confronted with potentially weak data (including a legitimate earnings recession for S&P companies that looks likely to reverse later in the year) to back off.  She did not allow her own forecast to become a suicide pact. Good on her.

    This isn't about the data, the Fed Chair or even the governors in D.C. -- it's about how the data is interpreted at the local level.  It's about making sure that nobody says, "5.5% unemployment is pretty close to full employment, let's start hiking," when that 5.5% national number is covering up massive layoffs in the energy patch.  Or when Michigan's 4.8% unemployment rate is covering up the complete and utter desertion of Detroit or an unemployment rate pushing 10% for African Americans nationwide.  

    It just makes sense to have other voices at the Fed who will tell you that there is enormous underutilized capacity in the U.S.  Meanwhile, both commercial and investment banks have good reason to want interest rates to rise. Look, for example at Bank of New York Mellon. It has nearly $30 trillion in assets under custody for which is is barely getting paid.  It owns the Dreyfus money market funds which, at low interest rates, are paying nothing to investors and so BNY can't charge fees.  If interest rates were to go up to 2-3%, Bank of New York Mellon would see a revenue stream suddenly turn on, at no additional cost.  They are not loving life right now.  So taking players like that out of the conversation at the Fed just makes sense.

    I'm all for data, I'm sure Clinton is as well. Let's just get all the right voices together to decide what to do with it.

    Thanks, Michael. Good subject. More on this later.

    Michael, note the Bloomberg article which brings up the issue of regional Fed Bank makeup---large versus "regional community banks. Is there a reference for actual makeup of the regionals? Are community banks at all successful in pushing lending more toward small businesses---are they, have they, lost ground because of the influence of larger banks?

    And the underlying question about Clinton's strategy is in the devils you don't know. Granted, banks have definite agendas---but at least they are, compared to conservative minions which might ascend to power at some point, relatively sane and stable.


    An interesting point here -- if the bankers were replaced with say, managers of large pension funds that own debt securities, you might not get a more favorable outcome as a bondbuyer might want higher interest rates with low inflation, as a way of meeting future obligations. Though, of course, a bondholder would have to buy a lot of new bonds to make up for the mark to market hit in that case.

    Still one could imagine that if you replace bankers with non-bank business people that they still might not have many interests in common with working people.

    (pssst, rmrd...)  From Ben Casselman, 538, tied to his article on us missing unions, not manufacturing:


    When the Federal Reserve’s policy-making Open Market Committee meets next month to decide whether to raise interest rates, every one of the 10 voting members will be white. Eleven of the 12 regional Fed bank presidents, who rotate voting responsibility, are white, and not one is black or Latino. (Minneapolis Fed President Neel Kashkari is Indian-American.) The Fed does a bit better when it comes to gender balance — Chair Janet Yellen is a woman, as are three other voting FOMC members. But overall, the people making U.S. monetary policy are disproportionately white men.

    Does that matter? More than 100 members of Congress think so. In a letter to Yellen on Thursday, 11 senators and 116 members of the House of Representatives — all of them Democrats — wrote that they are “deeply concerned that the Federal Reserve has not yet fulfilled its statutory and moral obligation to ensure that its leadership reflects the composition of our diverse nation.” The letter is only the latest effort to draw more attention to the Fed’s lack of diversity: A report earlier this year from the liberal Center for Popular Democracy highlighted the issue, and several members of Congress also asked Yellen about it when she testified on Capitol Hill in February. (Bernie Sanders signed the letter. Hillary Clinton, who wasn’t eligible to sign since she isn’t in Congress, said she agreed with the message.)

    It isn’t clear whether policy would be any different if the Fed were more diverse. But the letter writers and their allies argue that at the very least the Fed’s lack of representation could be skewing the way policymakers view the economy. By law, the Fed must balance two competing goals: maintaining stable prices (which the Fed defines as inflation of about 2 percent per year) and promoting full employment. In recent months, Yellen and her colleagues have begun the process of raising interest rates — concluding, in effect, that with the unemployment rate down to 5 percent, the “full employment” part of their mandate is largely complete. But the unemployment rate for African-Americans was 8.8 percent in April, as high as the white unemployment rate was in the middle of the recession. For them, “full employment” remains a long way off.


    Fantastic piece, Michael

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