- Goodfriend's approach runs counter to three core tenets of current orthodoxy: inflation, the balance sheet and congressional oversight.
- President Trump nominated Goodfriend to fill one of three vacancies on the Fed's board of governors.
- The most immediate impact the nominee might have is in the area of inflation targeting.
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."
Where he could make a difference
Inflation could be the area where Goodfriend could have a more immediate impact.
Yellen and others have entertained the idea of letting inflation run a little hotter than the 2 percent target before putting the clamps on. Though that's hardly been the issue lately, with price and particularly wage pressures low, some economists believe that won't last.
Indeed, the 2018 Fed could be the one to wrestle with the notion of how high inflation should run.
Fed watchers point to a statement Goodfriend made at a congressional hearing earlier this year, when he said, "The Fed's history of falling behind the curve on inflation is cause for concern."
"It is clear throughout his writings that he is more concerned about the Fed not defending its inflation target from the upside, i.e., that the Fed risks falling behind the curve, allowing inflation to rise above target and raising the specter of unanchored inflation expectations and a loss in Fed credibility that comes with it," Matthew Luzzetti, senior economist at Deutsche Bank, said in a note.
Goodfriend also has welcomed efforts to bring more congressional oversight on the Fed's policy decisions. During the March hearing where he spoke, he encouraged the 2 percent inflation target to be made a permanent part of the Fed's dual mandate.
Part of that process, he said, should be the Fed demonstrating that it is making decisions by measures such as the Taylor Rule, developed by John Taylor to gauge where the funds rate should be according to prevailing economic conditions.
The current funds rate is targeted between 1 percent and 1.25 percent; the Taylor Rule would put it closer to 3.4 percent, according to an Atlanta Fed tool.
"Each of these changes he appears to support in the context of enhancing the Fed's credibility in pursuing its dual mandate, which will, in turn, enhance the effectiveness of monetary policy in his view," Luzzetti said.
Goodfriend's views likely will find favor with the Republican membership, many of whom have expressed skepticism and distrust of the Fed.
"Dr. Marvin Goodfriend is a highly respected researcher on monetary- and macroeconomics and an impeccable conservative," Rep. Jeb Hensarling, chairman of the House Financial Services Committee, said in a statement. "He understands that consulting monetary policy rules can provide both instructive guidance for the Fed and transparency for the public."