Don't Let Trump's Fed Pick Choke the Recovery

Economist Marvin Goodfriend has been way too jittery about inflation. And he's been wrong.


Photographer: Andrew Harrer/Bloomberg

Marvin Goodfriend’s nomination is in trouble, and that’s a good thing.

Goodfriend is President Donald Trump’s pick to fill one of the four empty seats on the Federal Reserve Board. He faced a brutal interrogation from Senator Elizabeth Warren during his confirmation hearing in January, and has won few friends among Senate Democrats.

With only a 51-seat Republican Senate majority and GOP Senators John McCain and Thad Cochran facing health problems, the White House was already struggling to get the votes needed for Goodfriend’s confirmation. One Republican senator, Rand Paul, has threatened to vote against him.

While this is unfortunate for Goodfriend, it may be a blessing for the U.S. Whether by design or default, the nation has found itself in the midst of a momentous economic experiment. A combination of tax cuts and spending increases are creating an economic stimulus as large as the one that was enacted by a Democratic Congress in 2009. That one was a response to the financial crisis, though, and many economists fear that stimulating today’s recovering economy would be useless or worse.

Not so fast. There are strong reasons to doubt this claim. I believe that the U.S. economy has significant room to grow. Yet even if I am correct, the burgeoning boom could be cut short by overly aggressive monetary policy.

The Fed is supposed to balance the aims of maximum employment and stable prices. Today, that dual mandate implies that the central bank should be hesitant about raising interest rates, as tax cuts and potential increases in spending on infrastructure and the military work their way through the economy and increase overall demand.

Inflation? What Inflation?

U.S. unemployment rate and personal consumption expenditure price index

Source: Bureau of Labor Statistics

*Seasonally adjusted **An inflation measure often used by the Fed

Rising demand tends to push up prices and increase job growth. If lower tax rates encourage more investment, worker productivity should rise as well. Infrastructure improvements can have the same effect if they make it easier to conduct business. These productivity enhancements will tend to push prices back down.

The process may take time to work, so the Fed should take a wait-and-see approach, balancing the short-term risk of higher prices against the gains in employment and the potential longer-term price reductions from higher productivity.

Some monetary economists have argued, however, that the Fed should focus almost exclusively on stable prices. Keeping inflation low, they say, should override other concerns.

Marvin Goodfriend is one of those economists, making the case this way in a 1993 paper:

Reviewing the policy record makes one understand how fragile the Fed’s credibility is and how potentially costly it is to maintain. Even after inflation had stabilized at around 4 percent in 1983, inflation scares and the Fed’s reaction to them were associated with significant fluctuations in real growth. With that in mind, one cannot help but appreciate the potential value of a congressional mandate for price stability that would help the Fed establish a credible commitment to low inflation.

When interviewed by the Wall Street Journal in 2011, Goodfriend doubled down, insisting that only a firm resolve to suppress inflation would deliver long-term stability for a healthy economy.

QuickTake Full Employment

There is a certain appeal to this cool-headed reasoning. But it’s at odds with history and the facts. At least four times during the recovery from the 2008 financial crisis, Goodfriend warned against the Fed’s unconventional measures to get the economy moving.

He argued that falling unemployment was creating dangerous inflationary pressures that the Fed should combat — this while the unemployment rate was at 9.4 percent, then 9 percent, then 8.2 percent and finally 7 percent. Despite those warnings, inflation has run below the Fed’s target of 2 percent nearly every month since the recession ended as unemployment kept falling to around 4 percent today.

If Goodfriend brings his logic to the Fed today, the danger would rise that the central bank would stifle the latest economic stimulus before the experiment has run its course. For businesses, that would mean higher interest rates that would offset the tax cuts and reduce the returns to further investment. For workers, it would mean cutting short what promises to be the most competitive job market since the 1960s.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Karl W. Smith at

    To contact the editor responsible for this story:
    Jonathan Landman at

    Before it's here, it's on the Bloomberg Terminal.