- On Tuesday, the White House announced that it will nominate Allan Landon to fill one of two vacant seats on the Federal Reserve Board of governors.
- Landon is a former CEO of the Bank of Hawaii.
- Nobody seems to have any idea what Landon thinks about monetary policy, and he has no record of public statements on the subject.
- Lobbyists for community banks and their allies on Capitol Hill had been pushing for a Fed Board nominee with community bank experience, and now they have one.
DC's off-kilter Fed priorities
The push for a Federal Reserve Board member with community banking experience isn't crazy. By its very nature, the Federal Open Market Committee (FOMC) tends to be in touch with the thinking of the major Wall Street money center banks. The Fed's Vice Chairman, Stanley Fischer, did a stint working at Citigroup. And the Federal Reserve Board is, among other things, an influential bank regulator. So wanting a Board member who's sympathetic to small banks' interests makes some sense.
On the other hand, while the Fed is just one of several bank regulators (alongside the Treasury Department, the OCC, the CFPB, the SEC, the CFTC, and various state agencies), it is by far the largest player in the field of preventing recessions and inflation.
This job — monetary policy and macroeconomic stabilization — is the Federal Reserve's most important role by a large margin. The livelihoods of millions of workers rest in the hands of the FOMC. And yet Washington elected officials rarely seem able to bother themselves to care about Fed Board members' views on monetary policy. The Obama administration at times seems barely able to rouse itself to fill vacancies, and then fills them with little regard to candidates' monetary policy views. In this, they are largely following the lead of Congress, which manages to work itself up into various lathers about bank regulation but has little to say about the Fed's main job.
Monetary policy still matters
With the economy improving, it's tempting to think that the Fed's monetary policy role is going to matter less. There's something to this, but also a sense in which the improving economy makes presidential inattention to monetary policy even more baffling now. Obama appears to be of the school of thought that holds there's nothing much the Fed could do to boost the economy once interest rates have been cut to zero. He's probably wrong about this, but it at least explains what he and his team have been thinking (or not thinking) when considering monetary policy.
An improving economy looks very different.
After many years of short-term interest rates being held at zero, almost everyone expects the Federal Reserve to respond to the falling unemployment rate with an interest rate hike sometime in 2015. If that hike comes soon, it will mean slower growth in employment and wages. If the hike is postponed too long, it could mean inflation. But while there's plenty of controversy over what the Fed should do, it's pretty clear what the Fed's options are and that they'll be effective. Janet Yellen and her colleagues have the option of keeping rates low and trying to unleash a true economic boom.
But they could also decide to take the punch bowl away quickly in order to get ahead of the curve and head off any merely possible inflation — even at the cost of weak job creation and slow wage growth. This is a huge deal, and deserves to be front and center as Fed vacancies are considered. Inattention to monetary policy has been the Obama administration's biggest economic policy mistake. The Landon nomination appears to be a continuation of that error. But there's still one more Fed vacancy left, so it's not too late for the White House to make sure it's finding a candidate who's committed to aggressive job creation and higher pay.