Since last September, Vincent Reinhart has been resident scholar at the American Enterprise Institute, a Washington think tank, where he has the freedom to conduct research and no set responsibility to produce. But this academic, sporting a red vest and affecting a professorial manner reminiscent of an Oxford don, actually has a quarter of a century at the U.S. Federal Reserve behind his back.
Who: Vincent Reinhart, Resident Scholar, American Enterprise InstituteWhere: Teatro Goldoni, 1909 K Street, Washington, D.C., November 19, 2007On the Menu: Tuscan bean soup, pan roasted Alaskan sable and the inner workings of monetary policymaking.
During his last six years at the Fed, Reinhart played a dual role as Director of the Federal Reserve Board’s Division of Monetary Affairs and Secretary and Economist to the Federal Open Market Committee. His job was to prepare monetary aggregates data and Fed surveys for the Board of Governors — a key input in monetary policy decisions — and to edit and disseminate the notes of the FOMC meetings, a crucial output from the Fed to the public.
While not directly involved in decision-making, it is hard to find someone with better knowledge of how U.S. monetary policy is made. Moreover, Reinhart’s tenure, which began at the New York Fed in 1983 before continuing in D.C. in 1988, spanned not only the record-setting 18-year chairmanship of Alan Greenspan, but the second half of Paul Volcker’s reign as well as the start of Ben Bernanke’s.
It was, Reinhart admits, a great time to be at the Fed — perhaps the best era for monetary policy ever. The back of inflation was broken just about when Reinhart got to the Fed with a graduate degree from Columbia University, and the subsequent two decades were marked by monetary stability, steady economic growth, wealth creation and the development of financial markets.
Better KnowledgeWhat was the secret of the Fed’s success, especially compared to the failure of monetary policy during the 1970s? Were major mistakes made previously?
“It would be easy for me to admit that mistakes were made in the 1960s and 1970s,” smiles Reinhart. “But it was a combination of factors, not just greater monetary discipline.”
In particular, he credits the development of economic science and better understanding of how different parts of the economy fit together. Back then, the Fed wasn’t making decisions on a whim. They were based upon what was then thought to be solid economic principles, such as a supposed link between unemployment and inflation. Bringing down inflation was thought to entail a politically costly rise in unemployment.
The deregulation of the financial services industry and remarkable growth in financial markets also helped keep the economy stable. There is now far better understanding of risk and enhanced techniques of risk management for market players. The fact that the market largely sets the price of money — i.e., interest rates and exchange rates — gives greater flexibility for the financial system. A free market reacts to developments gradually over time, not all at once as tightly regulated markets tend to do.
In this regard, Reinhart stresses the need for timely and clear communications by the Fed — and not only because it was his job at the FOMC. Managing inflationary expectations in society is now seen as a key piece in keeping prices stable. The Fed has greatly expanded the quantity and quality of information it now delivers to the public.
“You should recall that a relatively short time ago the Fed never even announced its monetary policy decisions. Markets would guess what was decided by the FOMC by watching the Fed’s market operations after the meeting.”
Now, Bernanke has doubled the number of the Fed’s annual economic forecasts to four. Reinhart believes that there will always be ambiguity in the Fed’s communications, but they will concern such technical matters as points of market intervention, not broad policy decisions.