Yesterday Donald Trump nominated Marvin Goodfriend to the Federal Reserve Board of Governors, one of the numerous vacancies that have emerged over the course of the past year. While his prior nominations of Jay Powell as Chairman and Randal Quarles as Vice Chair represented a disappointing commitment to the status quo, his selection of Goodfriend is a dangerous act of outright betrayal to Trump’s core constituency of working-class voters.
The timing of the decision is ironic. After all, while Trump is busy lobbying Senate Republicans to support his desired tax cuts, he has decided to nominate a would-be central banker who wants to effectively tax the bank accounts of American citizens.
Last year at the Fed’s Jackson Hole gathering, Goodfriend presented a paper advocating for the Federal Reserve to join its peers in Japan and Europe in embracing a policy of negative interest rates. He compares the idea to central banks abolishing the gold standard, which he viewed as a pesky restriction on central banks ability to achieve price stability. Of course, to a certain extent, he’s correct. A gold standard limited the action of central bankers in much the same way that guard rails prevent reckless drivers from launching themselves off treacherous cliffs. By eliminating the zero bound for interest, Goodfriend is now proposing eliminating the mechanical limits to how fast a reckless driver can go.
The idea here is simple. As Goodfriend sees it, the Fed’s ability to stimulate the economy in the short term has been severely limited due to long-term interest rates being near zero. This is why the Fed and other central banks began various rounds of quantitative easing, using their balance sheets to buy Treasuries and other securities in order to flood financial institutions with liquidity and encourage them to invest in other financial assets. Goodfriend accurately notes some of the major risks with this approach:
Central banks will be tempted to rely even more heavily on balance sheet policy in lieu of interest rate policy, in effect exerting stimulus by fiscal policy means via distortionary credit allocation, the assumption of credit risk, and maturity transformation, all taking risks on behalf of taxpayers, and all moving central banks ever closer to destructive inflationary finance.
