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Narayana Kocherlakota
The next U.S. president will have the opportunity to appoint (or re-appoint) someone to one of the most powerful positions in the world: the chair of the U.S. Federal Reserve. Yet voters still know far too little about how the leading presidential candidates would go about choosing.
As far as I can tell, none of the websites of the five leading candidates — Hillary Clinton, Ted Cruz, John Kasich, Bernie Sanders or Donald Trump — offers any commentary on monetary policy or the Federal Reserve. Other clues, such as an oped by Senator Sanders on structural reform of the Fed or Senator Cruz’s support for a return to the gold standard, provide only a limited understanding of how they might approach selecting a Fed chair.
Hence, allow me to pose five questions that all of the candidates should address:
n The Fed has adopted an annual inflation target of 2 percent per year. Would you seek a chair who would want to change that monetary policy objective? If so, what kind of change?
n Neither the Fed nor Congress has quantified the Fed’s second monetary policy mandate — maximizing employment. Would you want the next chair to change the central bank’s approach to this mandate? If so, how?
n The House of Representatives has passed a bill requiring the Fed to employ a mathematical formula in setting interest rates and to explain any deviations from it. Would you seek a Fed chair who agreed with this approach to monetary policy?
n During the 2007-09 global financial crisis, the Fed took many unprecedented steps to provide support to the financial system. Would you be seeking a chair who would take a similarly interventionist approach in a crisis? More generally, how would your administration react to a financial crisis?
n The Dodd-Frank Act of 2010 requires that the president appoint a vice-chair for supervision and regulation to the Fed’s Board of Governors. That position remains unfilled. Would you seek to fill it, or leave its responsibilities to the Chair? In either case, how do you believe this job should be done?
The first three questions might strike some as unduly focused on monetary policy — after all, the Fed is supposed to make its interest-rate decisions independently, with no political pressure from elected officials such as the president. When it comes to the longer-term goals and strategies of monetary policy, however, I believe it is entirely appropriate — indeed, important — for the voters and their representatives to have a say.
The fourth and fifth questions involve financial stability, which many observers now see as the Fed’s third mandate (in addition to price stability and maximum employment). Certainly, the experience of the 2008 crisis has made the importance of financial stability abundantly clear to everyone. Voters need to understand how a new president would attempt to influence the Fed’s pursuit of this objective.
Congress has granted the Fed a great deal of independence to pursue its various missions. But that independence doesn’t come without oversight and accountability, which elected officials exercise primarily by deciding who will chair the Fed. It’s thus crucial that those officials — and above all anyone seeking the office of president — let the public know how they plan to do their job.
Narayana Kocherlakota, a Bloomberg View columnist, is the Lionel W. McKenzie professor of economics at the University of Rochester