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The Center for Popular Democracy (CPD), a progressive organizing group, is planning to launch a campaign to educate the public about monetary policy and encourage the Federal Reserve to give more attention to the full employment portion of its mandate.1 CPD approached us for support for the campaign after hearing about our interest in potentially funding advocacy in this space.
A version of CPD’s proposal that we received permission to share publicly is here. This version is significantly redacted and somewhat altered relative to the private version initially shared with us; in particular, it has a somewhat less overtly progressive tone. The budget for the campaign is variable, depending on CPD’s ability to attract funding, but is on the order of $1 million for the 12-month campaign.2
CPD’s stated “primary goals” for the campaign are to:
- Ensure that monetary policy contributes to sustained growth and prosperity. In order to achieve this, the Federal Open Market Committee should delay interest rate hikes until we reach full employment.
- Engage Fed officials in a discussion of the meaning of its “dual mandate.” Under Federal law, the Federal Reserve’s goal is to promote both “maximum employment” and “stable prices.” Maximum employment should feature rising wages, not stagnant ones, and should see more people pulled into the labor force, not fewer.
- Ensure that the American public is properly represented on the Boards of Directors of the regional Feds. Commercial banks play a central role in choosing Federal Reserve Presidents, through their power to appoint members of the regional Boards of Directors. There should be more opportunities for the public to express its opinions about who should be appointed to the Boards and presidencies and regional Feds and the public should have more of a voice in the regional Feds’ policy decision-making process.3
We essentially interpret the first two goals as trying to shift the center of the Federal Open Market Committee in a slightly more “dovish” direction (i.e. placing more weight on unemployment/slack as opposed to inflation, in favor of accommodative monetary policy), towards the position of Fed Chair Janet Yellen, who we would guess is already fairly close to, but slightly more dovish than, the center of opinion of FOMC members.4 We do not have terribly high confidence that shifting the FOMC slightly in Yellen’s direction would be beneficial for policy, but we think it is more likely than not because:
- A broadly dovish stance seems to be called for based on the current state of the economy: while unemployment has been declining, there seems to continue to be considerable economic slack.5 Inflation has continued to run below the Federal Reserve’s 2% target, though it may be picking up.6 This is not to say that we are confident that a more dovish policy than the FOMC has currently set would be more appropriate, but only that a broadly dovish stance, including the current FOMC stance, seems appropriate to hold.
- The large majority of outside advocacy to FOMC members appears to come from corporations and the financial industry,7 and most popular advocacy on monetary policy seems to come from conservatives and “hawks” (who have the opposite views as “doves”).8 While there is some debate about whether the FOMC could have had more expansionary policy over the last few years, the persistent underperformance of inflation relative to the 2% target suggests that to some extent they have erred on the side of more slack rather than more inflation.9
We regard both of these points together as important for making the argument that it would be better to have some outside advocacy to shift the FOMC in a slightly more dovish direction; neither seems sufficient on its own. If a dovish position were unwarranted, it would be undesirable to move the FOMC in a more dovish direction, regardless of what other outside advocates are pushing for. And if a broadly dovish position were warranted but the majority of outside advocates were pushing for a dovish position (and, as is the case, the FOMC was already taking a relatively dovish stance10), it would be much less clear that efforts to push the FOMC further in a dovish direction would be positive.
All of that said, because the Federal Reserve is a highly independent and not-particularly-publicly-accountable institution, we see the prospect that the campaign has a substantial impact on the conduct of monetary policy as relatively unlikely. We do not see any chance of moving the policy outside the range currently contemplated by FOMC members (and we regard that as a positive point). We anticipate devoting considerably more effort in the coming months to trying to understand the distribution of opinion on the FOMC and trying to determine with more confidence whether moving the center of FOMC opinion closer to Yellen would be likely to lead to better macroeconomic policy.
We find the campaign’s third goal more uncontroversially desirable. Regional Federal Reserve Bank presidents, who attend FOMC meetings and vote on a rotating basis, are selected by their boards of directors.11 The boards are made up of elected representatives of local banks and some representatives appointed by the Federal Reserve Board, but the selection process does not appear particularly transparent or accountable to the public.12 While we don’t see a huge amount of direct utilitarian consequences for this consideration, there seems to be a strong procedural presumption in favor of a more credible, transparent selection process for regional Federal Reserve Bank board members and, in turn, presidents.
In addition to our tentative view that the campaign’s goals are worthwhile ones, we see this opportunity as testing an important premise of the case for macroeconomic policy as a potential focus area. Many people we have spoken with have pointed to the lack of advocacy around the FOMC from those concerned about unemployment, and we have taken that argument as evidence that macroeconomic policy may be neglected as a philanthropic cause relative to its importance. By providing early stage funding that allows the campaign to get started more quickly and that allows us greater access to follow the campaign as it unfolds, we hope to test the hypothesis that there are good funding opportunities in advocacy around macroeconomic policy that are currently going unfunded.
While we would guess that the basic case we’ve articulated is reasonable, we see a number of reasons for concern around this opportunity:
- We could be wrong about what kinds of economic policy would actually be beneficial. There is substantial disagreement between economists on this question, and the arguments above could be mistaken.
- Most economists seem to believe that central bank independence is very important for maintaining sound macroeconomic policy, and it seems plausible that a successful campaign to influence Federal Reserve policy could undermine the Fed’s independent technocratic decisionmaking by encouraging advocates across the monetary policy spectrum to mobilize more thoroughly to represent their interests.13 Though conceptually possible, we think this outcome is very unlikely, in part because the Fed is already subject to outside advocacy (as described above).
- The possibility that the campaign could encounter organized opposition makes transparency more difficult than it would be for many other grants, since it makes the campaign—understandably—hesitant to be as publicly transparent about the details of their plans as we would normally expect.
- We don’t perceive ourselves to be in full agreement with CPD about optimal economic policies or to have a perfect grasp of precisely which activities the campaign will prioritize, raising the possibility that they could use funds to pursue ends that we would regard as harmful.
Overall, we see this as a potentially very important policy area, and CPD’s proposed campaign is the only example we have come across of an effort to try to engage the public more actively with these issues and to use public advocacy to try to move the center of FOMC opinion in a slightly more dovish direction.
Based on the balance of these considerations, we decided to make a grant of $100,000 to help the campaign get started, and to be able to follow the campaign more closely as it moves forward. We’re unusually uncertain about this grant, and we’re planning to investigate the considerations above in more depth in the coming months (conditional on retaining macroeconomic policy as a high-priority cause) to reach a decision about whether to contribute a more significant portion of the campaign’s overall budget.
|Bernstein 2014||Source (archive)|
|Blanchflower and Posen 2014||Source (archive)|
|CPD Federal Reserve Campaign Budget||Unpublished|
|CPD Federal Reserve Campaign Paper||Source|
|CPD Memo on the Alleged Insulation of the Federal Reserve from Political Pressure||Source|
|DeLong 2014||Source (archive)|
|Directors of Federal Reserve Banks and Branches||Source (archive)|
|Economist 2014||Source (archive)|
|Federal Advisory Council Meeting May 2014||Source (archive)|
|Federal Reserve Bank Presidents||Source (archive)|
|Fernald 2014||Source (archive)|
|FOMC Projections, June 2014||Source (archive)|
|FOMC Transcript March 2008||Source (archive)|
|Kiley 2014||Source (archive)|
|Notes from a conversation with Joe Gagnon on February 4, 2014||Source|
|Notes from a conversation with Josh Bivens on February 6, 2014||Source|
|Notes from a conversation with Laurence Ball on April 17, 2014||Source|
|Notes from a conversation with Mike Konczal on January 23, 2014||Source|
|Reuters Fed Dove-Hawk Scale||Source (archive)|
|Weisenthal 2014||Source (archive)|