Written exclusively for InTouch Capital Markets
11th April 2018
By Steven K. Beckner
The word is that the Senate will vote in May on Marvin Goodfriend’s nomination to become a member of the Federal Reserve Board of Governors.
Goodfriend, former Richmond Federal Reserve Bank director of research, would not only help fill the Board’s badly depleted ranks, he would provide much needed monetary expertise and, to deploy an over-used word, more diversity of thought on the Fed’s larger policymaking body — the Federal Open Market Committee.
But there is no assurance the 67-year-old Carnegie-Mellon University professor will win confirmation. There is very little margin for error for him to win a seat on the Fed Board.
In a narrowly divided Senate, in which Republicans hold a slim majority of 51, all 47 Democrats plus two Independents who regularly vote with them, are expected to vote against Goodfriend on the grounds he is too single-minded about curbing inflation. And at least one Republican, Kentucky Senator Rand Paul, has indicated he will vote against him.
If only one additional Republican votes ‘nay’ on the Goodfriend nomination or if one, such as Arizona’s Sen. John McCain, is absent due to illness, Vice President Mike Pence could cast a tie-breaking vote in Goodfriend’s favor. But if an additional Republican votes with the Democrats, Goodfriend’s nomination could go down — leaving the Board with just three members and leaving the FOMC with few real inflation “hawks.”
The Richmond Fed has long been an incubator of hawks, but when President Jeffrey Lacker, who was very much in that mold, was forced to resign last year, he was replaced by self-described “pragmatist” Thomas Barkin. The 56-year-old former business consultant, who is voting on the FOMC this year, backed the March 21 federal funds rate hike but is ambiguous at best about his thinking. As he told the Richmond Times-Dispatch last week, “I am pretty aggressively trying to represent the country, as opposed to a philosophy or as opposed to a constituent group. I think our board wanted me in this job to bring an independent view that took into account all the various perspectives we get.”
Goodfriend’s problem is that he raised hackles among libertarians like Sen. Paul when he was asked to come up with some creative ideas for how to confront a Japan-style zero lower bound situation for a conference back in 2000.
Brilliant monetary theorist that he is, Goodfriend postulated a way of underpinning a negative interest rate regime. The pitfall of negative interest rates — essentially charging people for holding bank balances to incentivize spending — is that depositors can simply withdraw cash and put it under their mattress. A possible solution, Goodfriend, suggested, would be to track that cash by putting a magnetic strip in banknotes so that holders could be charged interest on their unspent cash.
That idea doesn’t sit well with Sen. Paul and others distrustful of government invasions of privacy.
It seems a bit unfair to blame Goodfriend, usually a thorough-going free market advocate, for what was mostly an intellectual exercise. He wasn’t advocating a tax on cash, merely brainstorming hypothetical ways of implementing negative interest rates.
It would seem a shame if Goodfriend does not win confirmation, because the FOMC (and the Board) is rather thin just now on true economists and even thinner on hawks. The only true hawks remaining are Kansas City Fed President Esther George and Philadelphia Fed President Loretta Mester.