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What questions would you ask of Fed nominees?

economic-viewpoints(2).jpgPresident Obama's three nominees for the Federal Reserve board are scheduled to appear before the Senate Banking Committee onThursday.

Janet Yellen, currently the president of the San Francisco Federal Reserve, is nominated to be vice-chairman of the Fed's board of governors.

Peter Diamond, a Massachusetts Institute of Technology economist, and Sara Bloom Raskin, the banking regulator for the state of Maryland, are nominated to be board members.

While none of the nominations has been particularly controversial, the Senate did surprise the administration earlier this year with a fight over the re-nomination of Fed Chairman Ben S. Bernanke.

The Washington Post asked Josh Bivens, an economist with the Economic Policy Institute, and Doug Guthrie, dean of the business school at George Washington University, what senators should be asking the nominees. Their proposed questions, along with an explanation of why they would ask them, follows:

Josh Bivens
Should the Federal Reserve be providing more monetary stimulus to the economy than it is currently? What do you think are the data signals that indicate when it is time for the Federal Reserve to begin monetary tightening?

By far the most significant issue facing the Federal Reserve over the next couple of years will be sustaining what looks to be an increasingly fragile economic recovery. The unemployment rate stands today at 9.5 percent, and virtually all forecasts show that it will rise throughout most of this year and may not even peak until 2011. Yet, the boost to economic growth stemming from the Recovery Act will be all-but-gone by the last quarter of 2010 and there are rising headwinds to economic growth: private sector employment growth is decelerating, inflation-adjusted wages fell last month, many major trading partners of the United States have embraced austerity and will not be strong markets for U.S. exports anytime soon, and the state and local sector is poised to post the first full-year contraction since World War II.

Given that misplaced fears about deficits and the cost of fiscal support have made even things like extending unemployment insurance controversial, there is very little support on the horizon from fiscal policy.

This means that the most promising avenue for greater support to the economy is for the Federal Reserve to not just continue the extraordinary actions it has undertaken in the past 3 years, but to even expand their scope - making large-scale purchases of long-term debt, both public and private.

The new appointees, in my mind, must be willing to aggressively pursue monetary policy support until we have a genuine economic recovery in the job market. Further, they need to commit to not pre-emptively pulling the plug on robust recoveries based solely on low rates of unemployment. Too often in the past 30 years the Federal Reserve has sacrificed the prospects of workers in the name of fighting purely phantom inflations.

Lastly, the new appointees must be as ready to use their regulatory tools to deflate asset market bubbles before they grow big enough to threaten the overall economy. The latest recession was all-but-entirely the result of not addressing an obvious housing market bubble.

Doug Guthrie
What do you think the Federal Reserve¹s role should be in monitoring systemic risk? What is your view on the Federal Reserve¹s role with respect to the specific regulatory policies that are guiding investment banks and commercial banks?

I¹m interested less in the Federal Reserve¹s role in tinkering with monetary policy and much more about its long-term views on job creation and economic growth. In that sense, I think Janet Yellen is a solid appointment.

However, if you take a look at our most recent economic crisis, a lot of issues can be traced back to how deeply people in finance understood the issues of systemic risk, conflicts of interest, and how much incentives are aligned the right way... Systemic risk is something that individual banks and the people running them need to be taught and incentivized to monitor themselves. What the Fed should not do, however, is simply ignore these systemic problems when they are emerging and trying to control them by tinkering with interest rates.

By Ariana Eunjung Cha  |  July 15, 2010; 8:30 AM ET
Categories:  Federal Reserve  
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