We Don’t Know Where Larry Summers Stands On The Most Important Issue Facing The Fed

lawrence larry summers

Monetary policy.

That’s the massive issue on which we don’t really know the views of Larry Summers, who is one of the leading candidates to replace Ben Bernanke as Chairman of the Federal Reserve. And since monetary policy is pretty much the Fed’s whole thing, his lack of clear views are a pretty big deal.

This is a point that Matthew Yglesias got at yesterday, in arguing that it would probably be helpful for Summers to establish a position on some of the big monetary policy questions of the day to further his chances of being nominated by Obama.

Right now there’s this idea that Yellen is “dovish” and that Summers is “hawkish” but this is really a gross oversimplification.

Pretty much the only thing we have to go on, with Summers, are comments about how he hasn’t regarded QE to be particularly effective. But that doesn’t necessarily imply dovishness. Even the Fed seems to be losing faith in the power of QE, as it shifts its stimulative efforts more towards guidance about keeping future rates low. If Summers is sceptical about QE, but, say, a fan of Evan’s Rule (which promises to keep rates low until a certain unemployment threshold is hit) then perhaps Summers could be considered more dovish. We just don’t really know.

As an aside, calling Janet Yellen “dovish” is also an oversimplification. For one thing, she’s been correct in her assessment of the economy (predicting subdued inflation and weak growth), so the dovish stance hasn’t necessarily been philosophical–just correct. It’s also true that in the 90s she was battling with Alan Greenspan, warning about inflation risks, so she hasn’t spent her whole career just obsessing about one side of the Fed’s dual mandate.

The important thing about Janet Yellen isn’t just that she believes in more Fed action, but that she’s at the forefront of discussions about monetary policy technology — the new tools that monetary policy observers have been talking about and honing since the crisis. Back in January, Goldman Sachs argued that Yellen was basically a supporter of Nominal GDP targeting, which is one of the hottest ideas in monetary policy. Yellen hasn’t addressed the idea in name, but she’s a serious, leading edge monetary policy theorist.

A lot of the discussion about who will lead the Fed has either been about non-monetary policy questions (who’s close with Obama, who’s got the temerity for the job, etc.) and the part about monetary policy itself has been superficial.

But it seems clear that with Larry Summers, we really don’t know that much about where he stands on the single most important aspect of the Fed’s role.