Protests from diversity advocates notwithstanding, the Federal Reserve Bank of New York selected another white male, John Williams, to lead what is arguably the most important of the 12 district banks, charged as it is with implementing monetary policy through the conduct of open-market operations.
Williams has been president of the San Francisco Fed since 2011. He is a widely respected Ph.D. economist, whose recent research has focused on the neutral rate of interest — an unobservable rate that is consistent with full employment and stable prices — and alternate frameworks for the conduct of monetary policy, such as price-level targeting. (Under such a regime, the Fed would allow inflation to exceed its annual 2% target to offset six years of chronic undershoot.)
When word leaked out last week that Williams was the likely pick for the post, Democratic Sens. Kirsten Gillibrand of New York and Elizabeth Warren of Massachusetts ignored his qualifications in their quest for greater diversity at the Fed.
“The New York Fed plays a powerful and outsized role in overseeing Wall Street and shaping our nation’s economic and regulatory policy, and needs a leader who will put the interests of working families first and bring diversity and a different perspective to the table,” Gillibrand said in a statement last week. “The New York Fed has never been led by a woman or a person of color, and that needs to change.”
Gillibrand called for “congressional oversight and a public confirmation process.” (Congress already has oversight responsibility for the Fed.) Warren said Williams should testify before the Senate Banking Committee. She challenged his “fitness to supervise Wall Street banks, given the San Francisco Fed’s inadequate supervision of Wells Fargo WFC, +1.42% during its many consumer scandals.”
What about the San Francisco Fed’s inadequate supervision in the run-up to the 2008 financial crisis? The bank’s 12th district, encompassing nine Western states, was Ground Zero for the housing bubble and ensuing bust. Janet Yellen was at the helm of the San Francisco Fed at the time, from 2004 to 2010. Yet her nomination to become Fed vice chairman (2010) and ultimately chairman (2014) didn’t raise questions of her “fitness to supervise.”
It’s true that Yellen had warned internally about the possible fallout from elevated housing prices and the risks of the shadow banking system, according to Fed meeting transcripts from 2007. Publicly, however, she downplayed the effect. And the San Francisco Fed’s regulators turned a blind eye to fraudulent lending practices.
While Gillibrand and Warren were protesting Williams’ appointment to head the New York Fed, Raphael Bostic, the first African-American to lead one of the regional Fed banks, gave a rousing endorsement of Williams, a graduate school classmate at Stanford.
“He is smart. He has been an innovative manager, and he’s been a great colleague,” Bostic said in an interview with the Wall Street Journal. “I don’t think you’re going to find people who have more expertise and are better suited to do that kind of work.”
That’s what the country needs — and should want: the most qualified individual for the job. The interests of working families; African-American and Hispanic unemployment; pay equity for women: These are important issues facing the nation, but addressing them is not part of the Fed’s job description. Nor does it have the tools to do so.
The Fed’s job is the conduct of monetary policy. It uses a blunt instrument, the overnight interbank lending rate, to achieve its dual mandate of maximum sustainable employment and price stability.
Jerome Powell tried to drive home this point at his first congressional testimony as Fed chairman on Feb. 27. Asked repeatedly about the Fed’s interest in pursuing measures to address income inequality and pay equity for women, Powell explained that the Fed plans to stick with the job it has been assigned by Congress. The issues raised by lawmakers “are the kind of things that Congress should consider,” he said.
What if a family member were rushed to the emergency room in critical condition? Would you want the best educated doctors, with years of clinical training, attending to your loved one? Or would you demand an ER staff that looks like America?
Confronted with a life-or-death situation, I suspect most Americans would opt for the best and the brightest, with gender and ethnicity taking a back seat to qualifications.
Think of the Fed as the nation’s first line of defense against economic catastrophe. It can minister to the economy’s needs quickly, even if it is sometimes slow to grasp the nature of the crisis, as it was during the Great Depression and the Great Recession. Unlike Congress, the Fed can come to a consensus relatively quickly, without procedural hurdles or partisan bickering. But it needs top-notch, experienced practitioners in order to do so.
There is one area, however, where the Fed would benefit from diversity, and that’s in the realm of economic thought. For too long, the Fed has been dominated by Keynesian economists and adherents of the Phillips curve, which describes the illusive trade-off between inflation and unemployment.
That may not be the kind of diversity Warren and Gillibrand had in mind, but diverse views on how the economy operates would make for better policy decisions.