If President Donald Trump's nomination of Jerome Powell to lead the Federal Reserve was a way of preserving the status quo, his selection of Marvin Goodfriend for another vacancy is a way of challenging it.
Fed watchers primarily see Powell as essentially the next leg of an era begun by current Chair Janet Yellen. The Yellen Fed is looking to unwind slowly and carefully the policies the central bank put into place to pull the economy out of its financial crisis slump.
In Goodfriend, the Fed gets someone whose approach to monetary policy and financial system regulation runs counter to three core tenets of current orthodoxy:
- He believes in attacking inflation aggressively and wants to see the Fed's 2 percent inflation target codified by Congress as part of a rules-based approach to decision-making. That could make him a policy hawk in a field of doves.
- Rather than using the balance sheet through programs like quantitative easing as a stimulant, Goodfriend prefers negative rates during down times.
- Where Yellen and her predecessor, Ben Bernanke, have pushed back on congressional attempts at greater Fed oversight, Goodfriend would be more welcoming.
Those core beliefs come from statements Goodfriend, whose nomination was announced late Wednesday, has made in congressional testimony, papers and statements he made while at the Richmond Fed. Likely to gain relatively easy Senate approval and to take one of three Fed governor vacancies in early 2018, the Carnegie Mellon professor also brings a background steeped in economics that Powell does not.
"We find it likely that Goodfriend will be a voice for higher rates and support a faster implementation of policy normalization than soon-to-be Fed Chair Jerome Powell," Stephen Myrow, managing partner at Beacon Policy Advisors, said in a note. "This dynamic could present tensions between the two in the future, especially if Goodfriend takes up a more hawkish view towards monetary policy."
Goodfriend declined a request for comment.
With the current Fed lined up with advocates of gradual but slow rate increases, and the unwinding of the $4.5 trillion balance sheet already under way, the opportunities for Goodfriend to sway the current direction will be few.
However, Trump will have the opportunity to change the Fed complexion in a substantial way. If he names others who share Goodfriend's views — think former Fed Governor Kevin Warsh and Stanford economist John Taylor — it could dramatically alter the approach the central bank would take when faced with the next crisis.
The Bernanke-Yellen Fed lowered the target funds rate to near-zero and kept it there for seven years while ballooning the balance sheet through three rounds of QE. A Goodfriend/Warsh/Taylor Fed would be more inclined to eschew QE and take the benchmark rate below zero, then raise it as the incoming data warrant.
"Goodfriend's nomination also has implications for the pending vice chair slot, and it will make Trump's pick for this position all the more important in terms of ideology," Myrow said. "Considering all of this, and the fact that Powell is not a monetary economist by training, there could be added risks when it comes to dissents amongst the seven-member Fed board in the future."