Federal Reserve Research: Wake Up Before It's Too Late

I am familiar with the U.S. Federal Reserve System. Long ago I spent the first three (wonderful) years of my working life as an economist at the Board of Governors in DC, 1986-1989. Most recently I chaired the Fed's Model Validation Council, 2012-2013. In the intervening years I've had many engagements with the System, and I've sent many of my Ph.D. students, perhaps twenty, to work there.

So believe me when I say that during the last half-century, there were few better places in the world for a research economist to work, universities included. The research staff quality and esprit de corps were unmatched. Runner-up institutions, world-wide, were miles behind. And believe me as well when I say that I'm now worried.

When I read the recent Huffington Post piece, "Federal Reserve Employees Afraid To Speak Put Financial System At Risk," I was pretty alarmed. I figured it must be strongly negatively biased, so I made some personal inquiries. No -- pretty accurate. Wow. Well, I noticed, it focuses mostly on the Board's division of Supervision and Regulation (Sup&Reg), filled with lawyers. Surely the Board's key research divisions (Research and Statistics, Monetary Affairs, International Finance), filled with economists, are as healthy as ever. So I made some more inquiries. Not yet a Sup&Reg situation, but lots of bewilderment, concern, and top talent looking, or thinking of looking, for greener pastures. Wow.

I understand that we just went through the worst recession since the Great Depression, and that enforcing the ensuing legislation requires a major effort. But I also understand that effective institutions and stellar reputations take half-centuries to build but can collapse quickly, and moreover that, at a deep level, the Fed's research prowess is largely responsible for its respect and effectiveness. So if a new Fed regulatory culture must be built, then build it, but Fed senior management needs simultaneously to preserve and promote the serious research culture that drives Fed effectiveness. Related, people who don't deeply understand and appreciate serious research should never, ever, be promoted to senior management in divisions like Research and Statistics, Monetary Affairs, and International Finance.