Jeffrey Lacker was president of the Federal Reserve Bank of Richmond from 2004 to 2017, after starting his Fed career there in 1988 as a research economist. He has taught economics at universities and importantly continues to write and do research at the Mercatus Center at George Mason University, where he does work on monetary policy, payments, and central bank governance— these credentials are teh reason for his selection on the Central Bank Central Fed Independence Project and Mr lackers concluding contibution tha appears in Part6, below.
Donald Trump’s attacks on Fed chair Jay Powell’s leadership and the policy stance of members of the policy making Federal Open Market Committee - fair or not - have raised many questions about issues that have been percolating in the background. Fed governance — who does the Fed report to, and why, when it comes to making these decisions? To whom is the Fed accountable if its policies let inflation surge? Or if banks take on too much risk and go belly up? These are throny issues.
Even before I ask about the efficacy of the Fed’s bi-annual, formerly-named “Humphrey-Hawkins” testimonies to Congress, Jeff volunteers that they are not enough.
”I would think Congress ought to empanel, its own group of experts from across the spectrum from different points of view, and I think that would aid in their evaluation of the Fed's conduct and I think it would provide more constructive oversight,” he says.
”What they do now in the Humphrey Hawkins testimony that occurs twice a year is more theater really than constructive criticism,” he adds. There's Got-cha moments, and there are statements from members. But it's not a, you know, a deep analytical process by any means.”
So dive in and hear what Jeff has to say. Why he thinks the Fed should be restricted to only buying Treasury securities. And why the Fed’s policy framework review is useful as “a statement of how they conduct monetary policy, their strategy for achieving their goals.” But it falls short of the goal of accountability as it's not “a document that evaluates how they've done at achieving their goals.”
Independence is the Key to central banking success 00:02:19.650
The key to understanding monetary policy. Independence is to distinguish between monetary policy instruments like the Federal funds rate or the policy rate that it sets on a meeting to meeting or month to month or quarter to quarter basis and outcomes inflation. Unemployment, labor market, GDP growth and the like. Central banks function best when they have independent control over the setting of their policy instruments, so that they're not coerced into setting the policy instrument differently than they otherwise would. But at the same time central banks need to be accountable to the political system, to the legislatures that created them and oversee them, and they need to be accountable for the outcomes, for the inflation and growth outcomes that that result from their actions.
The framework agreement process is not about accountability 00:03:38.770
I don't think of it as accountability. So the Framework Review is reviewing a a short policy statement, a statement of how they conduct monetary policy, their strategy for achieving their goals. It's not a document that evaluates how they've done at achieving their goals. And the Framework Review doesn't produce an evaluation of how they've done at achieving their goals and what they could have done differently. In 2012. They adopted this framework. A statement of ‘Here's how we conduct policy.’ And they did that in order to be able to announce to the public in a broader context that they were going to target inflation at 2%. They wanted to reveal to the public that that 2% was their inflation target. But they didn't want to do that in a vacuum. Just send a 2% number out into the world. They wanted to put it in the context of, here's our monetary policy strategy. Our goal is 2% inflation. But we don't have a goal for the unemployment rate. Here's how we balance competing mandates, the employment mandate versus inflation. They revised it in 2020. This review is to look, is looking to revise it yet again, in light of experience they ought to internally evaluate that. But they're not promising any report this isn't going to provide an assessment of how well they've done.
Should there be some oversight of the Fed? 00:06:23.730
So, there actually is a group, a panel of experts, that looks at Federal reserve policy and conduct, and evaluates it and provides critiques. It's the Shadow Open Market Committee. It was founded in 1973. I've been on this group for a couple of years. I'm very honored to do so. They provide twice a year, some a meeting where they offer constructive criticism of how the Fed's doing, but I think, from the point of view of Congress and its responsibility to the American people for monetary policy and monetary stability, I would think Congress ought to empanel, its own group of experts from across the spectrum from different points of view, and I think that would aid their valuation of the Fed's conduct, and I think it would provide more constructive oversight. What they do now in the Humphrey Hawkins testimony that occurs twice a year is more theater really than constructive criticism. There's Gotcha moments, and there are statements from members. But it's not a, you know, a deep analytical process by any means. And I think the example of other central banks is useful. Other central banks have empaneled experts to come in, you know, in the 5 or 10 year horizon and provide a written evaluation of how the Central Bank's doing and constructive suggestions for how they might improve.
Ben Bernanke was tabbed by the BOE to review its processes 00:08:22.420
So, that was an episodic thing, though I mean other central banks have sort of built into their charter or their statute that, like every 5 years, there's an external review panel that's formed, I think, something like that would be more useful for Congress on an ongoing basis, or even more frequently, you know, 2 or 3 years.
The point of QE was…? Is…? 00:09:18.530
So the Fed embarked on quantitative easing on a couple of occasions in the 2010s. In the recovery from the great financial crisis and the great recession of 2008, 2009. The evidence on the likely empirical effect was scant and still remains murky and subject to question. It's not obvious. The effects are very large. I think that because of that. you know, you could think of it as maybe the equivalent to a certain amount of basis points on the Fed Funds rate. But I think that that trade-off that number is very uncertain, and I think the Fed wants to avoid placing a lot of weight on estimates of that effect. And so, as a result, I think they they'd like it to be a sidecar, you know, just sort of a something over there that sort of runs on its own. It's like, okay, we did all this stuff. We got a big balance sheet. We're just going run it off slowly, and let's not think much about what effect that's having one way or another. You know, if it has a big stimulus effect to have a big balance sheet, they can always offset that with a higher short term rate, and vice versa. If there isn't much of an effect, then the short-term rate might be lower than it otherwise would be. But I think the Fed really wants to avoid quantifying that effect.
The Fed should be restricted to buying US treasuries 00:14:14.530
I've argued in the past. Charlie Plosser is another one. My late colleague, Marvin Goodfriend, from the Fed Bank of Richmond is another, and several others have argued for a credit accord, that there ought to be an agreement that the fed doesn't do, lending to the private sector that all it holds is Treasury securities, and that lending to the private sector is. It's up to Congress. It's up to the administration. It's subject to the checks and balances of the appropriations process that's envisioned by the U.S. Constitution, and is accountable to the public that way. If the Congress wants to set up a standing, lending facility they could go right ahead. but they should lodge it in the Treasury and not the Fed. I think that would be better governance for the Fed. It would keep the Fed out of making sectoral allocation decisions about what sectors ought to get credit and what sectors should be deprived of credit. And I think would be make for a better central bank.
The Accord gave the Fed freedom to make policy 00:20:52.870
I relied on many other scholars for my knowledge of the series of events that gave rise to the 1951 Treasury Fed accord, and I won't go into the whole narrative in TikTok here. maybe some other date or some other episode, but The Accord is a statement of principle understood as giving the Fed the right to let the market for US Treasury securities equilibrate on its own, so that, let the Fed out from under its World War II obligation to the Treasury to peg interest rates on US, treasury debt specifically to keep them from rising too high. So, I think that's very relevant today, because it established the principle that the Fed sets a short term interest rate and lets and governs monetary conditions and money market conditions accordingly, as it see, fits to achieve its objectives of price, stability and maximum employment these days there's pressure on the fed to lower interest rates, as many others have pointed out, most politicians would like to see lower interest rates now to help them get reelected. but in addition, now, because of the large deficits, and because of the fact that the US. Debt is so large relative to the economy, the interest, expense on the debt is a much larger share of the Federal budget. Now, because of that, there's now tension in Congress and the Administration on the Fed to lower the borrowing costs of the US Treasury, and that was very much at stake when the original accord came into being. In 1951, I think the course of action in which the Fed actually tried to keep interest rates down for the sake of reducing the interest expense to the Federal government would be a grave mistake. There, in that direction lies the road to hyperinflation. Not that it wouldn't. We'd necessarily get there, but it's a bad way to conduct monetary policy. I think the evidence is clear on that. Instead,
The Fed still has that Freedom today 00:23:25.310
I think there ought to be a renewed appreciation for the value of letting us Treasury yields, reflect market conditions, so that all involved can know whether or not the Treasury is issuing too much debt relative to what the market can bear.
Jeff has dealt with these issues firsthand in his years at
Independence is the Key to central banking success 00:02:19.650
The key to understanding monetary policy. Independence is to distinguish between monetary policy instruments like the Federal funds rate or the policy rate that it sets on a meeting to meeting or month to month or quarter to quarter basis and outcomes inflation. Unemployment, labor market, GDP growth and the like. Central banks function best when they have independent control over the setting of their policy instruments, so that they're not coerced into setting the policy instrument differently than they otherwise would. But at the same time central banks need to be accountable to the political system, to the legislatures that created them and oversee them, and they need to be accountable for the outcomes, for the inflation and growth outcomes that that result from their actions.
The framework agreement process is not about accountability 00:03:38.770
I don't think of it as accountability. So the Framework Review is reviewing a a short policy statement, a statement of how they conduct monetary policy, their strategy for achieving their goals. It's not a document that evaluates how they've done at achieving their goals. And the Framework Review doesn't produce an evaluation of how they've done at achieving their goals and what they could have done differently. In 2012 they adopted this framework <with> a statement of ‘Here's how we conduct policy.’ And they did that in order to be able to announce to the public in a broader context that they were going to target inflation at 2%. They wanted to reveal to the public that that 2% was their inflation target. But they didn't want to do that in a vacuum. Just send a 2% number out into the world. They wanted to put it in the context of, here's our monetary policy strategy. Our goal is 2% inflation. But we don't have a goal for the unemployment rate. Here's how we balance competing mandates, the employment mandate versus inflation. They revised it in 2020. This review is to look, is looking to revise it yet again, in light of experience they ought to internally evaluate that. But they're not promising any report this isn't going to provide an assessment of how well they've done.
Should there be some oversight of the Fed? 00:06:23.730
So, there actually is a group, a panel of experts, that looks at Federal reserve policy and conduct, and evaluates it and provides critiques. It's the Shadow Open Market Committee. It was founded in 1973. I've been on this group for a couple of years. I'm very honored to do so. They provide twice a year, some a meeting where they offer constructive criticism of how the Fed's doing, but I think, from the point of view of Congress and its responsibility to the American people for monetary policy and monetary stability, I would think Congress ought to empanel, its own group of experts from across the spectrum from different points of view, and I think that would aid their valuation of the Fed's conduct, and I think it would provide more constructive oversight. What they do now in the Humphrey Hawkins testimony that occurs twice a year. Is more theater really than constructive criticism. There's Gotcha moments, and there are statements from members. But it's not a, you know, a deep analytical process by any means. And I think the example of other central banks is useful. Other central banks have empaneled experts to come in, you know, in the 5 or 10 year horizon and provide a written evaluation of how the Central Bank's doing and constructive suggestions for how they might improve.
Ben Bernanke was tabbed by the BOE to review its processes 00:08:22.420
So, that was an episodic thing, though I mean other central banks have sort of built into their charter or their statute that, like every 5 years, there's an external review panel that's formed, I think, something like that would be more useful for Congress on an ongoing basis, or even more frequently, you know, 2 or 3 years.
The point of QE was…? Is…? 00:09:18.530
So the Fed embarked on quantitative easing on a couple of occasions in the 2010s. In the recovery from the great financial crisis and the great recession of 2008, 2009. The evidence on the likely empirical effect was scant and still remains murky and subject to question. It's not obvious. The effects are very large. I think that because of that. you know, you could think of it as maybe the equivalent to a certain amount of basis points on the Fed Funds rate. But I think that that trade-off that number is very uncertain, and I think the Ded wants to avoid placing a lot of weight on estimates of that effect. And so, as a result, I think they they'd like it to be a sidecar, you know, just sort of a something over there that sort of runs on its own. It's like, okay, we did all this stuff. We got a big balance sheet. We're just going run it off slowly, and let's not think much about what effect that's having one way or another. You know, if it has a big stimulus effect to have a big balance sheet, they can always offset that with a higher short term rate, and vice versa. If there isn't much of an effect, then the short-term rate might be lower than it otherwise would be. But I think the Fed really wants to avoid quantifying that effect.
The Fed should be restricted to buying US Treasuries 00:14:14.530
I've argued in the past. Charlie Plosser is another one. My late colleague, Marvin Goodfriend, from the Fed Bank of Richmond is another, and several others have argued for a credit accord that there ought to be an agreement that the fed doesn't do lending to the private sector that all it holds is Treasury securities, and that lending to the private sector is. it's up to Congress. It's up to the administration. It's subject to the checks and balances of the appropriations process that's envisioned by the Us. Constitution, and is accountable to the public that way. If the Congress wants to set up a standing, lending facility. They could go right ahead. but they should lodge it in the treasury and not the fed. I think that would be better governance for the fed. It would keep the fed out of making sectoral allocation decisions about what sectors ought to get credit and what sectors should be deprived of credit. and I think would be make for a better central bank.
The Accord gave the Fed freedom to make policy 00:20:52.870
I relied on many other scholars for my knowledge of the series of events that gave rise to the 1951 Treasury Fed accord, and I won't go into the whole narrative …here. Maybe some other date or some other episode, but The Accord is a statement of principle understood as giving the Fed the right to let the market for US Treasury securities equilibrate on its own. So that, let the Fed out from under its World War II obligation to the Treasury to peg interest rates on US treasury debt specifically to keep them from rising too high.
So, I think that's very relevant today, because it established the principle that the Fed sets a short term interest rate and lets and governs monetary conditions and money market conditions accordingly, as it see, fits to achieve its objectives of price, stability and maximum employment. These days there's pressure on the fed to lower interest rates, as many others have pointed out, most politicians would like to see lower interest rates now to help them get re-elected. But in addition, now, because of the large deficits, and because of the fact that the US debt is so large relative to the economy, <that> the interest, expense on the debt is a much larger share of the Federal budget. Now, because of that, there's now tension in Congress and the Administration on the Fed to lower the borrowing costs of the US Treasury, and that was very much at stake when the original accord came into being. In 1951, I think the course of action in which the Fed actually tried to keep interest rates down for the sake of reducing the interest expense to the Federal government would be a grave mistake. There, in that direction lies the road to hyperinflation. Not that it wouldn't. We'd necessarily get there, but it's a bad way to conduct monetary policy. I think the evidence is clear on that. Instead,
The Fed still has that Freedom today 00:23:25.310
I think there ought to be a renewed appreciation for the value of letting us Treasury yields, reflect market conditions, so that all involved can know whether or not the Treasury is issuing too much debt relative to what the market can bear.
