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| Building a National Campaign for a Strong Economy: Fed Up

Is the Fed Due for a Revamp?

US News & World Report - November 13, 2014, by Katherine Peralta - Building on momentum from earlier this year, a group of policy advocates, economists and community organizations is calling for more transparency at the Federal Reserve, imploring that the Fed consider the plight of many who haven’t enjoyed the kind of recovery that recent positive economic data suggest.

The push for more access to the Fed is gaining momentum among the public and in Congress, though revamping a decades-old central banking system that’s helped stabilize the economy through multiple crises is not without controversy.

As two of the Fed’s most vocal critics of its current monetary policy near their retirement at the beginning of next year, a coalition called “Fed Up” is asking that the public have more say in the process of appointing their replacements and future Fed leaders. Members sent letters outlining their concerns to the Fed and will meet Friday with Fed Chair Janet Yellen in the District of Columbia.

As it progresses toward its dual objective of price stability and full employment, the Fed has said it will eventually raise short-term interest rates, which have been kept near zero since 2008 to stimulate growth. The coalition says since the economy isn’t yet strong enough to stand on its own, the Fed should maintain its easy-money policies, which make lending cheap for borrowers and businesses but don’t do much to boost those on fixed incomes like retirees.

“We're going to talk about our request that the Fed create more transparency in a democratic process for appointments and that it adopt more pro-jobs, pro-wages policies, more expansionary policies, so as to get us to full employment,” says Ady Barkan, staff attorney at the left-leaning Center for Popular Democracy, which is part of the coalition. “They need to target higher wage growth instead of stepping on the brakes the moment that wages start to rise, which is what the hawks want to do."

The term "hawk" refers to those who see the labor market as strong enough to merit a faster interest rate hike to keep inflation in check and pertains to outgoing regional Fed bank presidents Richard Fisher of Dallas and Charles Plosser of Philadelphia. Doves, like Yellen, believe that there is still enough slack in the labor market to warrant maintaining as low interest rates as possible.

Each of the 12 regional Federal Reserve banks selects its own president through a process that’s criticized as rather opaque. Those presidents rotate on five of the 12 seats on the Federal Open Market Committee, the group at the Fed that sets interest rates. The remaining seven members of the committee, including Yellen, are appointed by the president and confirmed by the Senate.

The 12 regional presidents report back to the rest of the Fed about economic trends from their respective districts on a regular basis – a compilation of data amalgamated in a “Beige Book” published eight times a year and used to assess the economy’s health.

A spokeswoman for the Philadelphia Fed said it has retained the services of executive search firm Korn Ferry to replace Plosser and “will consider a diverse group of candidates from inside and outside the Federal Reserve system.” A Dallas Fed representative said the bank’s board of directors is meeting today to discuss the presidential search process to replace Fisher.

Stronger economic data this year have prompted many to wonder whether the Fed should start raising interest rates sooner rather than later. The U.S. economy’s reached the lowest jobless rate in six years and has enjoyed the strongest stretch of job gains since 1999.

But the coalition argues that despite what the national numbers may say about the recovery, they don’t necessarily speak to the experience of a lot of people who still feel the recession in their communities.

Even though the Dallas metropolitan area had one of the strongest monthly job gains in the country in September and has a jobless rate of 5 percent, well below the national rate of 5.8 percent, Connie Paredes, a volunteer with the Texas Organizing Project who will meet with Yellen Friday, says the economy in Dallas still feels “not that great.”

“There are a lot of statistics out there about the unemployment rate and how things have gotten better. It doesn't really reflect the fact that there is a lot of underemployment,” Paredes says. “There are a lot of college graduates who aren't able to find jobs. There are a lot of professionals who have to take on extra jobs in order to make ends meet.”

But attempting to change the appointment system might not be the solution to get more “everyday” voices before the Fed. Guy Lebas, chief fixed income strategist at Janney Capital Markets, says it’s a “solution in search of a problem.”

“There’s very little wrong from an economic perspective with how the Fed selection process works now, and a majority of the members who have input into monetary policy are democratically selected,” Lebas says.

Yellen herself has said it’s important to maintain a diverse group of viewpoints within the Fed.

“I believe decisions by the Federal Reserve Board and the Federal Open Market Committee are better because of the range of views and perspectives brought to the table by my fellow policymakers, and I have encouraged this approach to decision-making at all levels and throughout the Fed System,” she said in an Oct. 30 speech in Washington.

There’s also a push in Congress for changes at the Fed. The new GOP leadership could introduce a new version of former congressman and presidential candidate Ron Paul’s Audit the Fed bill, which, as its name implies, calls for a full audit of the Fed – including internal discussions on monetary policy – by the Government Accountability Office. Critics worry if passed, the bill would allow Congress to interfere with the Fed’s decision-making.

And a level of independence from the public may not be such a bad thing, says Gary Burtless, a senior fellow at the Brookings Institution, citing the Fed’s handling of the economic crisis – which included bailing out large financial institutions and beginning unprecedented and controversial economic stimulus programs.

“I realize many things the Fed did, although most economists think were entirely justified, are still immensely unpopular among the public, but so what?” Burtless says. “We do have this layer of insulation that I think we should protect. The events of 2007 through 2009 confirm the absolute importance of having that level of insulation so that members of the Federal Reserve Board don’t worry that their deliberations, their decisions about monetary policy, are going to be immediately undone by populist and perhaps poorly understood objections from the general public.”