Center for Popular Democracy — Federal Reserve Campaign (2014)

The Center for Popular Democracy (CPD), a progressive organizing group, is planning to launch a campaign to educate the public about monetary policy and encourage the Federal Reserve to give more attention to the full employment portion of its mandate.1 CPD approached us for support for the campaign after hearing about our interest in potentially funding advocacy in this space.

A version of CPD’s proposal that we received permission to share publicly is here. This version is significantly redacted and somewhat altered relative to the private version initially shared with us; in particular, it has a somewhat less overtly progressive tone. The budget for the campaign is variable, depending on CPD’s ability to attract funding, but is on the order of $1 million for the 12-month campaign.2

CPD’s stated “primary goals” for the campaign are to:

We essentially interpret the first two goals as trying to shift the center of the Federal Open Market Committee in a slightly more “dovish” direction (i.e. placing more weight on unemployment/slack as opposed to inflation, in favor of accommodative monetary policy), towards the position of Fed Chair Janet Yellen, who we would guess is already fairly close to, but slightly more dovish than, the center of opinion of FOMC members.4 We do not have terribly high confidence that shifting the FOMC slightly in Yellen’s direction would be beneficial for policy, but we think it is more likely than not because:

• A broadly dovish stance seems to be called for based on the current state of the economy: while unemployment has been declining, there seems to continue to be considerable economic slack.5 Inflation has continued to run below the Federal Reserve’s 2% target, though it may be picking up.6 This is not to say that we are confident that a more dovish policy than the FOMC has currently set would be more appropriate, but only that a broadly dovish stance, including the current FOMC stance, seems appropriate to hold.
  
• The large majority of outside advocacy to FOMC members appears to come from corporations and the financial industry,7 and most popular advocacy on monetary policy seems to come from conservatives and “hawks” (who have the opposite views as “doves”).8 While there is some debate about whether the FOMC could have had more expansionary policy over the last few years, the persistent underperformance of inflation relative to the 2% target suggests that to some extent they have erred on the side of more slack rather than more inflation.9

We regard both of these points together as important for making the argument that it would be better to have some outside advocacy to shift the FOMC in a slightly more dovish direction; neither seems sufficient on its own. If a dovish position were unwarranted, it would be undesirable to move the FOMC in a more dovish direction, regardless of what other outside advocates are pushing for. And if a broadly dovish position were warranted but the majority of outside advocates were pushing for a dovish position (and, as is the case, the FOMC was already taking a relatively dovish stance10), it would be much less clear that efforts to push the FOMC further in a dovish direction would be positive.

All of that said, because the Federal Reserve is a highly independent and not-particularly-publicly-accountable institution, we see the prospect that the campaign has a substantial impact on the conduct of monetary policy as relatively unlikely. We do not see any chance of moving the policy outside the range currently contemplated by FOMC members (and we regard that as a positive point). We anticipate devoting considerably more effort in the coming months to trying to understand the distribution of opinion on the FOMC and trying to determine with more confidence whether moving the center of FOMC opinion closer to Yellen would be likely to lead to better macroeconomic policy.

We find the campaign’s third goal more uncontroversially desirable. Regional Federal Reserve Bank presidents, who attend FOMC meetings and vote on a rotating basis, are selected by their boards of directors.11 The boards are made up of elected representatives of local banks and some representatives appointed by the Federal Reserve Board, but the selection process does not appear particularly transparent or accountable to the public.12 While we don’t see a huge amount of direct utilitarian consequences for this consideration, there seems to be a strong procedural presumption in favor of a more credible, transparent selection process for regional Federal Reserve Bank board members and, in turn, presidents.

In addition to our tentative view that the campaign’s goals are worthwhile ones, we see this opportunity as testing an important premise of the case for macroeconomic policy as a potential focus area. Many people we have spoken with have pointed to the lack of advocacy around the FOMC from those concerned about unemployment, and we have taken that argument as evidence that macroeconomic policy may be neglected as a philanthropic cause relative to its importance. By providing early stage funding that allows the campaign to get started more quickly and that allows us greater access to follow the campaign as it unfolds, we hope to test the hypothesis that there are good funding opportunities in advocacy around macroeconomic policy that are currently going unfunded.

While we would guess that the basic case we’ve articulated is reasonable, we see a number of reasons for concern around this opportunity:

• We could be wrong about what kinds of economic policy would actually be beneficial. There is substantial disagreement between economists on this question, and the arguments above could be mistaken.
• Most economists seem to believe that central bank independence is very important for maintaining sound macroeconomic policy, and it seems plausible that a successful campaign to influence Federal Reserve policy could undermine the Fed’s independent technocratic decisionmaking by encouraging advocates across the monetary policy spectrum to mobilize more thoroughly to represent their interests.13 Though conceptually possible, we think this outcome is very unlikely, in part because the Fed is already subject to outside advocacy (as described above).
• The possibility that the campaign could encounter organized opposition makes transparency more difficult than it would be for many other grants, since it makes the campaign—understandably—hesitant to be as publicly transparent about the details of their plans as we would normally expect.
• We don’t perceive ourselves to be in full agreement with CPD about optimal economic policies or to have a perfect grasp of precisely which activities the campaign will prioritize, raising the possibility that they could use funds to pursue ends that we would regard as harmful.

Overall, we see this as a potentially very important policy area, and CPD’s proposed campaign is the only example we have come across of an effort to try to engage the public more actively with these issues and to use public advocacy to try to move the center of FOMC opinion in a slightly more dovish direction.

Based on the balance of these considerations, we decided to make a grant of $100,000 to help the campaign get started, and to be able to follow the campaign more closely as it moves forward. We’re unusually uncertain about this grant, and we’re planning to investigate the considerations above in more depth in the coming months (conditional on retaining macroeconomic policy as a high-priority cause) to reach a decision about whether to contribute a more significant portion of the campaign’s overall budget.

Read more:

Sources

• 1.

  “We propose to launch a campaign to help inform members of the public about the importance of these issues and to expand public discourse about monetary policy, job creation, and wage growth. Pro-growth monetary policy should be a central component of the public policy agenda. Rather than cede the debate over monetary policy to the business elite, working families and their allies need to talk about these issues and their importance to the country.” CPD Federal Reserve Campaign Paper

• 2.

  CPD Federal Reserve Campaign Budget

• 3.

  CPD Federal Reserve Campaign Paper

• 4.

  See, e.g., Reuters Fed Dove-Hawk Scale. Note that different commentators assess the leanings of FOMC members differently.

• 5.

  See, e.g., Fernald 2014, Kiley 2014, Blanchflower and Posen 2014, and Bernstein 2014.

• 6.

  Commentators disagree about the likely future path of inflation. See, e.g., Weisenthal 2014 and DeLong 2014.

• 7.
  • CPD Memo on the Alleged Insulation of the Federal Reserve from Political Pressure shows that banks and their lobbyists meet frequently with Federal Reserve policymakers, but we would guess that most such meetings are about regulatory issues, as opposed to monetary policy.
  • There are other venues in which banks and corporations are more clearly able to express their interests with respect to monetary policy:
    • The published records from the May 2014 meeting between the Federal Advisory Council (made up of banks) and the Federal Reserve Board of Governors includes the following passage: “The current policy stance of phased (but not guaranteed) tapering, subject to multiple economic performance measures and goals, appears to be prudent.
      Many on the Council believe that the Fed’s bias towards an extended near-zero federal funds rate should be weighed carefully as the economy continues to improve, especially since most on the Council believe that economic growth will accelerate significantly in the second half of 2014.” in answer to the question “How would the Council assess the current stance of monetary policy?” Federal Advisory Council Meeting May 2014 pg 14.

    • During Federal Open Market Committee meetings, regional Federal Reserve Bank presidents report on the economic conditions in their districts, often based on conversations with business leaders. We only read the transcript from the March 18, 2008 meeting (transcripts are released with a 5 year delay), but there were numerous instances of FOMC members reporting on conversations with businesses or banks, sometimes in ways that directly bear on appropriate monetary policy. For instance, Yellen, then president of the San Francisco Federal Reserve Bank, said: “In fact, we have also been looking at monthly data on coincident business cycle indicators, and that examination suggests to us that the NBER may well date the beginning of the recession to last November. The prospect of this outcome has been made more palpable for me by the rather sudden increase in the frequency and intensity of pretty dire comments I am hearing from my contacts,” and Pianalto, of the Cleveland Fed, said, “I still expect the trend of inflation to fall below 2 percent by 2010, but I still worry that we are going to continue to experience upside surprises to that inflation outlook. Indeed, I can’t recall a single conversation that I have had with my business contacts recently that hasn’t touched on the increasing cost pressures that they are facing. In most cases, they are now successfully passing along price increases to their customers.” FOMC Transcript March 2008
  • That said, it is not obvious to us what the monetary policy views of the majority of bankers and corporate leaders are. Expansionary monetary policy generally raises equity prices, at least in the short term, which may benefit some bankers and corporate leaders.
• 8.
  • “The Federal Reserve System (“the Fed”) received a significant amount of pressure from conservatives to reduce its intervention in the economy following its response to the Great Recession, but it received little pressure to increase its efforts to reduce unemployment. The lack of pressure from the organized left was especially notable. There may have been less liberal pressure on the Fed because many liberals believe that fiscal policy is a more effective means of reducing unemployment at the zero lower bound than monetary policy.” Notes from a conversation with Josh Bivens on February 6, 2014
  • “It would be good for unions and advocates for low-income people to be more vocal in calling for the Federal Reserve to aggressively address unemployment. In the past, liberal populists criticized the Federal Reserve for raising interest rates too much during economic prosperity, but today the main critics are on the political right.” Notes from a conversation with Laurence Ball on April 17, 2014
  • Notes from a conversation with Mike Konczal on January 23, 2014:
    • “Traditionally, many right-wing think tanks have had monetary policy researchers, but these researchers have generally been driven by ideology, have not produced rigorous research, and have focused on fringe topics, such as the benefits of a gold standard.”
    • “Many high-profile economists, such as Paul Krugman and Christina Romer, have advocated for the Fed to increase its effort to reduce unemployment.
      However, there is no advocacy network or advocacy institution that works to improve macroeconomic policy in the short- or long-term. Macroeconomic policy is the political issue with the least advocacy capacity relative to the size of the issue. When policy ideas such as increasing the minimum wage receive public attention, a network of scholars and activists are prepared to influence the discourse around that issue. No such network exists for macroeconomic policy, as is evident from the lack of advocacy during the current macroeconomic downturn.”
  • “’Tight money’ advocates were very critical of the Federal Reserve’s response to the Great Recession, predicting that the Fed would cause high inflation with its policies. Tight money advocates’ predictions turned out to be incorrect. ‘Loose money’ advocates were much less organized and played less of a role in the public debate. If loose money advocates had been more engaged, the Federal Reserve might have done more to reduce unemployment. Dr. Gagnon believes that it would have been good for loose money advocates to have been more politically active.” Notes from a conversation with Joe Gagnon on February 4, 2014
• 9.

  “This misreading begins with its assessment of the stance of monetary policy; in the BIS’s view low interest rates are indicative of loose monetary policy. My colleague seconds this view, writing that central banks are determined to “keep monetary policy as loose as possible for as long as possible”. But this doesn’t add up. It suggests, for one thing, that monetary policy was remarkably loose during the Depression and extremely tight during the inflations of the 1970s, which we know is not true. It ignores, for another, that central banks have not remotely used all the tools at their disposal. The European Central Bank, which has yet to try QE, is the most obvious example, but most rich-world central banks have at least considered at various points using more aggressively expansionary policy (including everything from changes in policy target to purchases of private assets or foreign exchange), only to opt not to. It’s not the loosest possible policy if there are plenty more arrows in the quiver.
  Most importantly, it was until very recently taken for granted that loose money meant policy that allows for excessively fast demand growth, leading to unacceptably rapid growth in nominal output, inflation, and wages. Rich economies currently suffer from none of those ailments. One could conclude then that policy is not too loose.” Economist 2014

• 10.

  FOMC participants generally do not project raising interest rates (from effectively 0) until 2015, and expect rates to stay below their longer-run target through the end of 2016. See “Appropriate pace of policy firming” dot chart on page 3 of FOMC Projections, June 2014. That said, there is significant heterogeneity in FOMC participants’ projections of appropriate policy interest rates at the end of 2015 and 2016.

• 11.

  “The Federal Reserve Act provides that the president of a Federal Reserve Bank shall be the chief executive officer of the Bank, appointed by the board of directors of the Bank, with the approval of the Board of Governors of the Federal Reserve System, for a term of five years.” Federal Reserve Bank Presidents

• 12.

  “Under the Federal Reserve Act, each of the twelve Reserve Banks is separately incorporated with its own board of directors. In each Reserve District, commercial banks that are members of the Federal Reserve System own the stock of their District’s Reserve Bank and elect the majority of the Reserve Bank’s board of directors; the remainder of the directors are appointed by the Federal Reserve Board.” Directors of Federal Reserve Banks and Branches

• 13.

  “Dr. Bivens believes that many Fed policymakers worry that additional political engagement in monetary policy would be a mistake. Although policymakers might welcome support for their current policies, they seem to worry that more vocal engagement by political agents might be harmful in the future when the Fed needs to raise interest rates to prevent inflation.
  Dr. Bivens believes that fears about popular control of macroeconomic policy are overblown because:

  • The economy is still far from achieving full employment today. More pressure from liberals would likely lead to better policies in the short term, and long-term consequences could be dealt with in the future if they become a problem.
  • The Fed is usually too conservative in its projections of the non-accelerating inflation rate of unemployment (NAIRU). When the unemployment rate nears 5.5%, experts will debate whether the economy is approaching the NAIRU. Dr. Bivens does not want the Fed to be overly cautious in this situation; he would like to see evidence of accelerating inflation before the Fed slows the growth of the economy. People have generally been confident that the NAIRU is near 5.5%, but in the late 90s, the unemployment rate fell below 4% for a couple of months without accelerating inflation.
  • As Lawrence Summers argues, it might be the case that the economy will consistently struggle to generate sufficient demand for the next couple of decades. In such a situation, pressure from liberals for more aggressive macroeconomic policy would be very useful and would be unlikely to lead to problems.”

  Notes from a conversation with Josh Bivens on February 6, 2014