March 18, 2015
Few words are more likely to make the eyes glaze and the mind wonder than “monetary policy.”
Most people know the Federal Reserve is important, but don’t quite realize just how much influence it has over their lives. But there is no other institution in America that more immediately affects economic growth, unemployment, and inflation.
The recent selection of a new president at the Philadelphia Federal Reserve Bank caused little comment outside expert circles. The bank’s board of directors selected one of its colleagues, a former Wharton dean named Patrick Harker, to replace retiring president Charles Plosser, who had been one of the sharpest internal critics of the central bank's loose monetary policy. The press release announcing Harker's appointment, effective July 1, 2015, enthused over his local bonafides – he is president of the University of Delaware – but provides little insight into why he was selected.
“The debate we are having right now is over when the Fed will begin raising interest rates, which will immediately affect everyone because it’s going to slow the economy.” – Mark Price, labor economist, Keystone Research Center
That might not be so important if the president of the Philadelphia Federal Reserve just generated useful research, offered financial services to local banks, and issued periodic updates on the economic state of the region (which includes most of Pennsylvania, the southern half of New Jersey, and Delaware). But regional bank presidents also sit on the Federal Open Market Committee (FOMC) in Washington D.C., revolving out of the four seats reserved for the 11 their banks. (The larger New York bank has a permanent seat, as does the chair and the rest of the Board of Governors.)
The FOMC makes the big policy decisions that affect the Federal Reserve’s twin goals of keeping unemployment and inflation low. This is largely accomplished by setting interest rates. In attempting to grapple with the Great Recession, for example, the FOMC chose to keep interest rates close to zero to encourage spending and economic growth. It partially worked: Inflation remains at historic lows, but wages are still stagnant and the unemployment numbers may not be as robust as they appear.
On Tuesday, the FOMC kicked off a two-day policy meeting, to be followed by a statement from Fed Chair Janet Yellen on Wednesday afternoon. Most economists expect the Fed to remove a pledge to be "patient" about raising interest rates from its statement. Market strategists said with or without a change in the language, the Fed may still be on track to raise rates as early as June.
“The debate we are having right now is over when the Fed will begin raising interest rates, which will immediately affect everyone because it’s going to slow the economy,” said Mark Price, a labor economist with the Keystone Research Center in Harrisburg. “The concern that a lot of economists have is that we are not anywhere near the point where inflation is out of control. The key problem we face right now is that there’s just no wage and income growth.”
The FOMC could do more to stimulate the economy by keeping interest rates low and, more radically, releasing money to governments and taxpayers instead of banks. Instead the FOMC seems set to drive interest rates up in 2015, even though “market indications suggest inflation is more likely to fall than rise,” as Lawrence Summers recently warned in the Washington Post. This bias toward a very conservative view of inflation may simply be baked into the process of selecting regional Federal Reserve presidents, who in turn vote on the FOMC.
Philadelphia Federal Reserve President Charles Plosser is interviewed in June 2014 on the Fox Business Network, in New York. Plosser, a leading inflation "hawk" at the Federal Reserve, retired in earlier this month. (Richard Drew, File / AP)
All regional fed boards are balanced between those meant to represent the banking industry and those meant to represent the public – whose interests, in Philadelphia’s case, are served by executives from Comcast and Allied Barton, among other powerful regional companies. The public, as it is usually defined, is allowed little insight into the process and no power over it.
“We have been petitioning to figure out the criteria for who would be selected since October and we didn’t get any clear response,” said Kendra Brooks, a member of community activist group ACTION United in Philadelphia and the organizer of its Fed Up coalition, which seeks to bring greater transparency and accountability to the institution. “Even when asked, up until the Friday before the announcement was made on Monday, we were told it was unclear who was getting that seat and that it would be vacant for some time. It’s an issue of transparency, especially when most of the people are bankers and corporate elites.”
Brooks argued the process can produce results that do not represent the region’s interests.
Plosser is an extremely conservative economist solely concerned with keeping inflation down. He disdained the Federal Reserve’s mandate to achieve maximum employment.
“Eventually that stuff [chronic joblessness] will sort itself out,” he told the Wall Street Journal in 2011. In his last speech as head of the Philadelphia Federal Reserve he argued that the institution should abandon employment as a policy priority and only worry about inflation.
It is unclear where Harker will stand on the Federal Reserve’s dual mandate or on the more salient question of whether interest rates should be held down to prevent economic growth from slowing. (The Philadelphia Federal Reserve did not respond to queries before press time.) In any case, he will not have a vote on the FOMC this year.
But there seems little doubt what his region needs. In addition to being home to some of the nation’s worst pockets of concentrated poverty – in Chester, Camden, Reading and Trenton – Philadelphia’s median income fell by 13.5 percent in the last 15 years. Keeping interest rates close to zero would not solve these problems, but it would seem a slowing economy would only make the pain worse.
