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Commentary By Peter Ireland

Remembering Allan Meltzer and the Lessons He Taught Us

Economics Finance

Allan Meltzer, distinguished Professor of Economics at Carnegie-Mellon University, founder of the Shadow Open Market Committee, and author of a monumental multi-volume History of the Federal Reserve, passed away one year ago today, on May 8, 2017.  Great minds like Meltzer’s are all too rare and, once gone, can never be replaced.  No one possesses anything like Meltzer’s extraordinary command over economic theory, sweeping knowledge of monetary history, and astute political acumen.  Nor can anyone match the astonishing energy and enthusiasm he devoted to his teaching, writing, and research, and his kindness and generosity to colleagues, students, and friends.

As with all great scholars, Meltzer inspired others to do their very best to follow in his footsteps.  The anniversary of his passing provides all of us who knew and admired him with a chance to reflect on the events of the past year and imagine how he might have responded.  

Most likely, Meltzer would have been cheered by the continuing strength of the U.S. economy and impressed by President Trump’s appointments to the Federal Reserve Board.  At the same time, Meltzer surely would have emphasized that much more work needs to be done within the Federal Reserve System, to make its monetary and regulatory policies more systematic and effective.

It is easy to see Meltzer being pleased with the economy’s recent performance.  Last week’s jobs report showed the U.S. unemployment rate declining to 3.9 percent, a mark not seen since the end of the decade-long boom in 2000.  Meanwhile, inflation by most measures is running just a hair’s width below the Federal Reserve’s long-run two percent target. As a historian of Federal Reserve policy, Meltzer could point out that today, the central bank has come closer than ever to achieving both sides of its dual mandate for price stability and maximum sustainable employment, a remarkable achievement.

Meltzer would also be pleased by recent appointments to the Federal Reserve Board.  New Chairman Jerome Powell has picked up right where his predecessor Janet Yellen left off, delivering a consistent message that, with economic growth accelerating and inflation moving backing to target, the Fed’s most important task now lies in bringing its policy rates back to more normal levels.  Meltzer would have supported the Fed’s recent interest rate increases. Even more important, he would remain steadfast in urging Chairman Powell to stand ready to move rates higher still, to prevent inflation from overshooting target and thereby avoid a mistake that would be costlier to correct.

Meltzer would have been impressed by the experience and skill that Randal Quarles brings to his new role as the Fed’s Vice Chair for Supervision.  Of course, Meltzer was extremely happy with the appointment of Marvin Goodfriend, his protégé at Carnegie-Mellon, to one of the four open positions that remain on the Federal Reserve Board.  Likewise, Meltzer would surely view President Trump’s two most recent nominees to the Fed Board, Richard Clarida and Michelle Bowman, as exceptionally capable and well-qualified candidates for the job.  Just as surely, Meltzer would be vocal in encouraging the U.S. Senate to confirm these outstanding Board nominees as quickly as possible, as our economy cannot be well-served when the seven-seat panel remains at less than half of its full strength.

But while Meltzer always showed great respect for the individuals who serve our country at the Fed, he never relented in pushing them to improve their policy-making strategies.  One major theme that runs through Meltzer’s work is that monetary policy works best when it is conducted systematically, according to “rules rather than discretion.” Today, Meltzer would surely be asking Federal Reserve officials why they have resisted calls, from Congress and other academic economists including Stanford University professor John Taylor, to make more consistent reference to an interest rate rule for setting the federal funds rate.  

Meltzer would be pressing those officials to make clear, as well, their ultimate plans for the size of the Federal Reserve’s balance sheet and to codify more systematically the mix of “unconventional” policy actions they might take during the next cyclical downturn, if and when the federal funds rate again hits its zero lower bound.  

On regulatory policy, it is likely that Meltzer would be even more adamant, calling for the Fed to establish stricter rules for emergency lending during future episodes of financial stress.  Above all, Meltzer would insist that the Fed renounce, once and for all and in no uncertain terms, the doctrine of “too big to fail” that, all too often in the past, has promoted dangerously excessive risk-taking by the largest banks.

In short, the lessons that Allan Meltzer always tried to teach remain as relevant today as they’ve ever been.  By remembering him, we can also remember that policymakers can do much more to make the American economy stronger, more stable, and more resilient in the face of shocks.

Peter Ireland is a professor of economics at Boston College and a member of the Shadow Open Market Committee.

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