Senate Banking Committee should vote no on Randal Quarles

Tomorrow the Senate Banking Committee will vote on the first Trump administration nominee to the Federal Reserve Board of Governors, Randal Quarles. As we’ve noted again and again in recent years, members of the Federal Open Market Committee (FOMC), which include Fed governors, have extraordinary power over American economic policy. A primary job for the FOMC is balancing the two prongs of the Fed’s “dual mandate”—the pursuit of maximum employment consistent with stability of prices (or at least stability of inflation). For too many years over recent decades the Fed has privileged avoiding any outbreak of above-target inflation over the need to pursue maximum employment and keep labor markets tight. This failure to target and achieve genuine full employment has been a key driver in the rise of income inequality and the failure of wages for the vast majority to meaningfully outpace inflation. Currently, this debate over full employment and the dual mandate centers over concerns that the Fed may have begun raising short-term interest rates too early and too rapidly, threatening to drag on the pace of economic recovery and progress in reducing unemployment.

Quarles has made it clear that he does not think that recent interest rate increases have proceeded too rapidly. In fact, he has made a conventionally conservative mistake in declaring that low interest rates are a “threat to financial stability.” This outlook should not come as a huge surprise. A key reason why the Fed in recent decades has privileged extreme inflation control over tight labor markets has been because the financial sector and wealth holders are extremely averse to inflation surprises. The financial sector dominates governance of the regional Federal Reserve banks, which supply 5/12ths of the votes of the FOMC. Quarles’ arguments against efforts to aggressively pursue genuine full employment are fully consistent with his background as a self-described “Wall Street lawyer.”

Quarles’ misdiagnosis of low interest rates as a threat to financial stability rather than an aid to achieving full employment is particularly worrisome given that he is being specifically considered for the position of vice chair in charge of financial supervision in the Board of Governors. This means that he would be the Fed’s point person in matters of financial regulation and stability. And besides his misdiagnosis about the threat of low interest rates, Quarles’ positions on other matters of importance to financial regulation and stability are similarly misguided. For example, Quarles has opposed the Volcker Rule—a regulation that limits bank risk-taking with depositor money and is essentially already a compromise effort to restore some of the safety that the Glass Steagall act providing the banking sector before it was repealed in 1999. While serving as an official in the George W. Bush Treasury Department in the years immediately preceding the worst financial crisis in a generation, Quarles argued that: “Markets are always ahead of regulators, and frankly that’s how it should be.”

Finally, it’s worth noting how out-of-step Quarles’ views on financial regulation would seem to be with Fed Chair Janet Yellen. Last week at the annual Economic Policy Symposium, organized by the Kansas City Fed in Jackson Hole, Wyoming, Yellen gave a full-throated defense of the beefed-up regulations passed in the wake of the 2007-09 financial crisis. Her views were buttressed by a thorough review of the economic evidence assessing the impact of these regulations. Quarles’ views instead seem simply shaped by ideology and a career spent on Wall Street. Given this, and given that freeing Fed decision-making from the yoke of Wall Street influence should be a key guide-star in making Fed nominations, it is clear that Randal Quarles is the wrong person for the job as the Fed’s vice chair for financial supervision.

Given this, the Fed Up campaign, which advocates for a Federal Reserve that takes the lives of ordinary working people into greater account, is asking people to call their senators and express their opposition to Quarles. You can read why Fed Up opposes his nomination and be connected with the appropriate Senate office on their website.