The Trump administration has selected candidates for at least two of the three open positions on the Federal Reserve’s Board of Governors, reports The New York Times.
The expected nominees are Randal K. Quarles and Marvin Goodfriend.
Quarles is a former Carlyle Group partner and also coordinated the Plunge Protection Team during part of the George W. Bush administration. I discuss more about him here.
The more shocking pick is Goodfriend, currently a professor of economics at Carnegie Mellon University. Here is the shocker as explained by The Financial Times:
Goodfriend’s opposition to balance sheet expansion is paired with a radical willingness to embrace deeply negative rates.Goodfriend spoke on the subject at the Federal Reserve Bank of Kansas City’s economic symposium at Jackson Hole in 2016.
In one paragraph of his speech, he managed to
go full-Keynesian, anti-gold and in support of negative interest rates:
The zero interest bound is an encumbrance on monetary policy to be removed, much as the gold standard and the fixed foreign exchange rate encumbrances were removed, to free the price level from the destabilizing influence of a relative price over which monetary policy has little control—in this case, so movements in the intertemporal terms of trade can be reflected fully in interest rate policy to stabilize employment and inflation over the business cycle.Here is FT introducing what Goodfriend also proposed in the speech:
Of course, deeply negative interest rates are difficult to impose when paper money exists as an alternative. Even after costs of storage, the effective lower bound probably isn’t much below -1 per cent. Goodfriend’s proposed solution to this challenge is truly radical (emphasis FT).
So here is how Goodfriend wants to get around the "problem" of the difficulty of imposing negative interest rates:
The zero bound encumbrance on interest rate policy could be eliminated completely and expeditiously by discontinuing the central bank defense of the par deposit price of paper currency. The central bank would still stand ready to exchange bank reserves and commercial bank deposits at par; and it could stand ready to convert different denominations of paper currency at par. However, the central bank would no longer let the outstanding stock of paper currency vary elastically to accommodate the deposit demand for paper currency at par.
Instead the central bank could grow the aggregate stock of paper currency according to a rule designed to make the deposit price of paper currency fluctuate around par over time. The paper currency growth rule would utilize: i) historical evidence relating currency demand to GDP, ii) the estimated interest opportunity cost sensitivity of the demand for currency relative to GDP, and iii) the GDP growth rate....…The deposit price of paper currency would adjust flexibly much as floating exchange rates adjust to equilibrate the foreign exchange market when international interest rates differ from each other.The FT explains what this means:
In other words, the value of a paper dollar would no longer be guaranteed. It may say $10 on the front but if the policy rate were -10 per cent the piece of paper would only be worth $9. Here’s his conclusion (emphasis FT):...
The idea of negative nominal interest rates takes some getting used to, but it should be possible to persuade the public that such flexibility is well worth it to provide better employment security and more secure lifetime savings.This is one of the most insane monetary policies I have ever come across---and there are many to choose from.Can you imagine walking around with dollars that can be instantly charged a negative interest rate by the Federal Reserve at any time?
I have heard of many insane monetary policy schemes but this tops them all.