This article was originally published at the Working Economics Blog of the Economic Policy Institute.
Those hoping to chart a new course in economic policy that delivers real gains, not just cynical rhetoric, to American workers have been closely following electoral politics throughout the country. But elections aren’t the only way change can happen. A case in point is the search currently under way to replace William Dudley as the president of the Federal Reserve Bank of New York.
We have written plenty before about the importance of the Federal Reserve in determining whether American workers will have a chance to see serious wage growth in coming years. Put simply, the Federal Reserve controls the economy’s brakes. If they decide the pace of economic growth is fast enough to risk overheating, leading to an outbreak of accelerating inflation, they step on the brake. No other policy has a hope at creating jobs and delivering broad-based wage growth if the Fed uses this brake prematurely. Recent decades have seen exactly this premature use of brakes, and the result has been unemployment kept too high to give typical workers the economic leverage and bargaining power they need to achieve substantial wage gains.
Why has the Fed often ridden the economy’s brakes too hard in recent decades? Mostly because they have a loud backseat driver that is terrified of any unexpected inflation: the nation’s financial sector. Unexpected inflation decreases the value of financial assets and transfers resources from creditors to debtors. Wealthy households and creditors—the prime clients of finance—want to avoid this kind of inflation-induced transfer at all costs. And the costs of avoiding it are high indeed. Excess unemployment, justified in the name of putting relentless downward pressure on inflation, is a key reason why inflation-adjusted wages for typical workers have nearly stagnated over most recent decades.
And why does the Fed listen to their noisy backseat driver from the financial sector? This gets us to the search for a new president of the New York Fed. Regional Fed banks provide five of the 12 votes in the Federal Open Market Committee (FOMC), which sets the nation’s monetary policy. Eleven of the regional banks rotate on and off the FOMC over a course of years, with four of these 11 having a vote at any given time. The president of the N.Y. Fed, however, occupies a permanent seat on the FOMC, and is even the official vice chair of the committee (the chair of the FOMC is the chair of the Board of Governors at the Federal Reserve).
Despite its permanent seat on the FOMC, the N.Y. Fed is like the other regional Feds in that it picks its own president with just minimal public accountability. The position is not nominated by the president of the United States and is not confirmed by the Senate, as are the seven governors of the Federal Reserve Board who also sit on the FOMC. Instead, the position is picked by its own board of directors. And like the boards of all other regional Feds, the N.Y. Fed board is stuffed with representatives from finance and corporate business.
The processes by which regional Fed presidents are picked are extremely opaque. This opacity has surely contributed to the miserable record in managing to pick regional bank presidents from diverse backgrounds—either by gender, race, ethnicity, or economic background. In recent years, the Minneapolis and Atlanta Feds have made small strides in increasing transparency and have picked candidates of color to head their banks. Other banks—Dallas and Philadelphia and Richmond—have not.
The upshot of this complicated and opaque governance structure is that five of 12 votes on the FOMC are chosen with almost no democratic accountability, and are chosen from institutions dominated by financial and corporate entities. It’s little wonder why the Fed has too often been part of the problem rather than part of the solution when it comes to delivering good jobs and wage growth for American workers.
Too often, but not always! In the late 1990s, the Fed largely held off the brakes even as unemployment dipped far below what was deemed prudent if all you cared about was controlling inflation. The result of holding off the brakes was not an outbreak of inflation, but instead was the only period of across-the-board wage growth in a generation. And between 2007 and 2016, the Fed worked harder and more consistently than any other economic policymaking institution to deliver a real recovery to American workers.
But in 2017, some backsliding began, and the Fed undertook a number of interest rate increases meant to brake the economy’s speed, even as inflation remained stubbornly below the Fed’s long-term targets. This braking should stop, and the Fed should aggressively probe just how low unemployment can go and how fast jobs can keep growing, stepping on the brake only when inflation actually appears.
The next N.Y. Fed president will have the chance to argue this. They will also have the chance to argue for continued vigilance from the Fed in policing Wall Street for the kind of excessive risk-taking and irresponsibility that helped lead to the Great Recession. Far too often the claim is made that the N.Y. Fed president must be a creature of financial markets to do the job well. This is nonsense; the N.Y. Fed president needs to be committed to the virtues of genuine full employment and to the need to contain financial market excesses. They need to be excellent managers—the N.Y. Fed is a huge institution. But they don’t need to come from a culture that thinks what’s good for the Dow is good for American workers. That’s just not true, and we need policymakers who understand this.
To ensure that the search committee of the N.Y. Fed understands all of this, a number of groups (including EPI) are calling for an open, transparent process that takes seriously the idea that the next N.Y. Fed president will have a crucially important role in economic policymaking and must think of their stakeholders as extending well beyond Wall Street. Elections matter, of course, but the fight for a fairer economy has crucial skirmishes that need to be addressed all the time. Who occupies the presidency of the N.Y. Fed is one of these.