Will three vacant seats at the Federal Reserve and Yellen’s and Fisher’s terms ending next year, Donald Trump has the opportunity to perform a much needed overhaul of the Fed. We could be looking at an entirely new regime for monetary policy in as little as twelve months. Regime change would be a risk to many complacent bond investors, but it would also be a welcome change for income investors who have been starved of yield for years in the name of stimulating the economy.
One of the biggest problems with the Fed is that it has been captured by the academic establishment. Below, Joe Ricketts, founder of TD Ameritrade makes the case that the Fed needs more business leaders and bankers making policy.
Which brings me to the Federal Reserve. In 2012 Jim Grant, the longtime financial journalist, delivered a speech at the Federal Reserve Bank of New York. “In the not quite 100 years since the founding of your institution,” he said, “America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard.”
Central banking, in other words, is now dominated by academics. And while I don’t blame them for it, academics by their nature come to decision-making with a distinctly—you guessed it—academic perspective. The shift described by Mr. Grant has had consequences. For one thing, simplicity based on age-old practice has been replaced by complexity based on econometric theory. Big Data has played an increasingly prominent role in how the Fed operates, even as the Fed’s role in the economy has deepened and widened.
Rather than enlisting business leaders and bankers to fulfill the Fed’s increasingly complex mission, the nation’s political and monetary authorities turned primarily to the world’s most brilliant economists, who can be thought of more and more as monetary scientists. “Central bankers have invited politicians to abdicate leadership authority to an inbred society of PhD academics who are infected to their core with groupthink, or as I prefer to think of it: ‘groupstink,’ ” argues former Dallas Fed analyst Danielle DiMartino Booth in a new book.
Ten of the 17 current Fed governors and regional bank presidents have doctorates in economics. Few have much experience in the private economy. Most have spent the bulk of their careers at the classroom lectern or in Washington. This is a sea change. In past decades, Fed members and governors frequently had experience in banking, industry and agriculture…
Those who have actually taken risks in the market—as entrepreneurs, business executives or bank chiefs—have unique perspectives on the effects of monetary policy that economists necessarily lack. These individuals can tell you how a particular policy might affect their decisions, as well as the decisions of those in related industries, and all the knock-on effects that the policy would produce across the economy.
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Jeremy Jones, CFA
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