The “People’s Fed” and the Oracles of Jackson Hole
When William Greider wrote his 1989 book about the Federal Reserve, it’s not hard to understand why he called it “Secrets of the Temple.” The Fed’s proclamations can make it seem as mysterious as the Oracle of Delphi. (To be fair, nobody has speculated that hallucinogens are involved, as seems to have been the case in Delphi.)
The Fed’s oracular sages gathered in Jackson Hole, Wyoming last week for the central bank’s annual retreat. But this year’s meeting was different: For perhaps the first time in history, some of the Fed’s leaders met with activists who are fighting to change it.
Actually, the Fed’s not as mysterious as it seems. Some of the its behavior can be explained by its hybrid nature as a publicly created, but partly private, entity. (It’s reportedly the only central bank in the world that is not fully public.) As a result, the Fed’s leaders must struggle to accomplish their goals within a complex set of accountabilities, with multiple boards of directors that include many of the same bankers they are supposed to regulate.
What’s more, even casual utterances by the Fed chair can roil global markets, so some of her proclamations must remain at least mildly cryptic out of necessity. The chair, Janet Yellen, gave a lengthy speech last week that covered a number of topics, but this was the phrase heard around the world:
“I believe the case for an increase in the federal funds rate has strengthened in recent months.”
That comment, while noncommittal, provoked a great deal of commentary. Interest rate hikes are a tool for cooling down the economy when it’s “overheating.” That hardly seems to be the case right now. The “case for an increase” may be stronger than it was, but it’s still weaker than the case for waiting. (Economists Dean Baker and L. Josh Bivens have more.)
It’s worth noting that Janet Yellen is the Fed’s chair, not its CEO, and that the Fed’s monetary policy is set by committee. Yellen must satisfy both its public and private constituencies, which means navigating between public demands for accountability and a private-sector penchant for secrecy. She has a tough job.
The Fed has a governance problem. What’s the solution? Some right-wingers want to abolish it altogether, but that’s a terrible idea. Its current design is flawed, but abolishing it would mean surrendering our financial destiny to the bankers whose unchecked greed inevitably leads to fraud and collapse.
As the Oracle at Delphi reportedly once said: “Love of money and nothing else will ruin Sparta.”
Fortunately, there’s another option. The Fed could become a fully public entity, accountable only to the polity that created it. Economists have long fought to insulate the Fed from political influence. But, despite what some of its practitioners seem to believe, economics is neither a priesthood nor a physical science. Economics uses quantitative measurements but is rived with ideological divisions, theoretical arguments and subjective differences in perception.
The Fed can’t be managed by coolly objective technocrats, because such creatures don’t exist in the real world.
Public accountability is the goal of a “People’s Fed” proposal from Fed Up, the group that organized last week’s meeting between officials and activists. (Here are our own “People’s Fed” thoughts, from 2014.) Fed Up and its allies want the Fed to avoid taking steps that could harm the economy for working people, like a premature rate hike, and appoint leadership that more closely resembles our diverse population.
They also want the Fed to come up with better responses to the interrelated emergencies now plaguing the American majority – including racial and economic inequality, a weak job market and declining wages. Ultimately, they want the Fed to be publicly governed.
These are not unreasonable requests. The Fed showed remarkable creativity when it responded to Wall Street’s existential crisis in 2008. It invented new fiscal tools, retroactively reclassified non-banking institutions like Goldman Sachs and GE Capital as banks so that they could be rescued and, as we learned through Bernie Sanders’ Government Accountability Office audit, made enormous sums of money available for the bailout.
Today the middle class faces an existential crisis. Many communities of color are in danger. So are the young people who struggle with unemployment, underemployment, and closed doors of opportunity. The Fed should act as forcefully and imaginatively in the face of their crises as it did for Wall Street’s.
Many of the officials who met with Fed Up’s activists expressed support, at least in principle, for the group’s goals. That’s commendable. But they are hamstrung by, among other things, their own institution’s structure.
As long as the Fed’s organizational culture is dominated by the financial sector, it cannot reflect the American people’s needs, hopes and values. And as long as its ownership and accountability remain hazy, even an oracle won’t be able to tell us who it’s really here to serve.