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War is too important to be left to the generals, it’s often said, and that could also describe monetary policy and the academics who tend to run it. With few exceptions, the world’s central bankers went to the same universities and subscribe to the same orthodoxies.
When the Federal Reserve’s Open Market Committee meets on Tuesday and Wednesday, it’s all but certain to leave its key federal-funds rate target unchanged at 1% to 1.25%. At the same time, the Fed’s policy-setting panel is expected to announce that it is starting to reduce its $4 trillion-plus balance sheet. That long-awaited and long-discussed step would reverse the radical steps taken to combat the great financial crisis following Lehman Brothers’ bankruptcy, the ninth anniversary of which passed last week.
The standard parameters for Fed policy are full employment with price stability, which hardly seem controversial. To a great extent, those conditions have been met. The most widely watched measure of unemployment last month put it at 4.4%, while employers complain that they can’t find enough qualified job applicants. Inflation, however, continues to run below the Fed’s 2% target, which has been the main impediment to further rate hikes.
That decision-making process comes out of academia. In recent years, the Massachusetts Institute of Technology has boasted notable central-bank heads among its Ph.D. program’s alumni, including former Fed Chairman Ben Bernanke and current European Central Bank President Mario Draghi, both of whom studied under soon-to-depart Fed Vice Chairman Stanley Fischer.
In the process, there has been a considerable confluence of monetary policies pursued by central banks, including the ECB, the Bank of Japan, and the Bank of England. Each pushed interest rates to unprecedentedly low levels—in some cases, below zero—and each aggressively expanded its balance sheet, buying securities to inject cash into its financial system. These policies halted the crisis. But since then, they’ve been more successful in pushing up asset prices, especially stocks, than in producing strong expansions with robust pay gains for working people.
Given that decidedly mixed record, it seemed worthwhile to chat with some folks who, to cite the former (and ungrammatical) Apple slogan, think different.
Academic economists didn’t always run Fed policy. During most of the 1950s and 1960s, William McChesney Martin Jr., a former stockbroker and Big Board governor, led the central bank when it began to conduct monetary policy independently of the Treasury Department. That often put it in conflict with other branches of the government. President Lyndon Johnson literally manhandled Martin over proposed interest-rate hikes, which LBJ saw as hurting his guns-and-butter policies during the Vietnam War.
“Mr. Martin was famous for not being an economist,” recalls Dan Fuss, Loomis Sayles’ vice chairman. When Fuss managed Yale University’s investment portfolio in the early 1970s, the then-retired former Fed chief sat on the investment committee. Martin spoke with “many, many, many people around the country and was a great listener,” Fuss says. That eclectic approach was summed up in his most famous policy prescription: that the Fed should “take away the punch bowl when the party got going” in order to stave off inflation. In other words, policies could not always be dictated by models and formulas.
So, we thought it might be worthwhile to learn what some non-Ph.Ds would do if they were to fill one of the three vacancies on the Fed’s Board of Governors, which numbers seven at full strength. The FOMC’s voting members also include five Fed district presidents, four of whom rotate, with the New York Fed president having a permanent vote.
We sent queries to a couple of folks who typically don’t enter the debate over Fed actions, but who head organizations with extraordinary influence over the U.S. economy or financial markets. We would have valued the insights of Jeff Bezos, the chief executive of, and Larry Fink, head of BlackRock, the world’s biggest asset manager, but they didn’t respond to our inquiries.
OTHERS, INCLUDING FUSS, DID, HOWEVER. In his view, noneconomic factors weigh heavily on the Fed. “No matter what they feel about inflation, the Fed, the ECB, and the Bank of Japan are trapped by geopolitics,” he says. Smaller banks need an interest-rate increase to attract deposits to fund loans, “but this is a tough environment to have a strictly domestic viewpoint,” he adds. So, if he had to vote, Fuss would find excuses to delay raising rates, but would set out “a moderate plan” to begin shrinking the Fed’s balance sheet.
If there was a consensus among the nonconsensus thinkers we queried, it wasn’t only that the Fed should shrink its balance sheet, but that the process should have started a while ago. “The market has become accustomed to this unusual, radical policy,” says Cliff Noreen, deputy chief investment officer of MassMutual. Now would be an ideal time to start undoing that policy; the equity and debt markets are strong, while the dollar is down 10%, so this is a propitious time for a tightening via the balance sheet and a quarter-point fed-funds rate hike, he contends.
On a more fundamental level, a number of respondents question what monetary policy can and cannot accomplish, and what deleterious side effects its decisions can have.
“All a central bank can do is help to create a stable monetary environment,” writes longtime Barron’s Roundtable member Felix Zulauf, who heads Zulauf Asset Management in Baar, Switzerland. “Monetary policy cannot create jobs,” which depend on capital, entrepreneurs, and a sound public education system to prepare students for challenging work, among other things outside the Fed’s purview, he adds.
In addition, the Fed’s policies have introduced distortions in asset markets, notably commercial real estate, asserts Danielle DiMartino Booth, author of Fed Up, a critique of the central bank, and the Money Strong newsletter. Even so, she sees Yellen & Co. being backed into a corner, so she would hold off on a rate hike for now but get on with normalizing the balance sheet.
James Grant, editor of Grant’s Interest Rate Observer and a Barron’s alum from way back, says that the distortive effects of the Fed’s policies are apparent in “outsize valuations” for stocks. “How else do you explain depression-level interest, conjoined with boom-time [price/earnings multiples]?” he asks rhetorically. Almost 10 years past the crisis, crisis-level rates and a $4 trillion-plus balance sheet are “blowing a bubble.”
“If we think that the U.S. economy is too encumbered to support normal interest rates, we should say so,” Grant continues. Otherwise, get on with “long overdue” normalization of Fed policy, even if the stock market suffers. Jim agrees with Felix that monetary policy can’t boost employment, and he’d vote for an immediate quarter-point rate hike and a start to balance-sheet reduction.
In contrast, David P. Goldman, the former head of credit research at Bank of America and today a polymath at large—he writes on economics, politics, arts, and opera—favors no rate increase and a very slow balance-sheet slimming. The low level of inflation, he says, indicates slack demand. More fundamentally, the Fed shouldn’t undertake any changes in a failed policy until it knows why that policy failed. And, he says, the underlying problems of low productivity and income growth require fiscal and regulatory solutions that create incentives for investment to stimulate growth. “The Fed can’t normalize monetary policy until the right fiscal policy is in place,” Goldman concludes.
Robert Kessler, who heads Kessler Investment Advisors in Denver, sees a danger of recession. The only reason to raise rates now, he argues, is to be able to lower them if the economy turns down.

“That’s idiotic,” he says. Kessler maintains that the economy can’t stand higher rates. Consumers can’t increase spending, given their indebtedness, which will be exacerbated by the recent hurricanes.
Unfortunate folks may get back, say, $20,000 on autos totaled by floods, on which they may still owe $25,000 on loans that stretch seven years or more. “Normalization made sense in the 1990s,” during the internet boom, but not now, he continues, adding that the next recession will probably force the Fed to cut rates below zero, as the ECB and BOJ have had to do.
Finally, Paul Kasriel offers a novel idea for the Fed: Focus on money and credit, whose growth has slowed precipitously. The senior economic and investment advisor for Legacy Private Trust in Neenah, Wis., says the sum of Fed-created credit (currency, plus bank reserves) plus bank-created credit leads the economy. Growth in this measure is now down to a 3.5% year-on-year rate, from about 5% a year ago, which explains why U.S. economic activity is sluggish. Kasriel would expand, not shrink, the Fed’s balance sheet to restore 5% growth, and let the market set the fed-funds rate.
Clearly, there are more approaches to monetary policy than what’s practiced by the Janet Yellen Fed. Its policies have boosted prices for assets, such as stocks, without benefiting economic and income growth nearly as much. Deep national divisions are a result. As Einstein supposedly said, the definition of insanity is doing the same thing over and over again and expecting different results.