Count me among those disappointed to learn that Jeremy Stein is stepping down as one of the governors of the Federal Reserve. With his return next month to Harvard, I worry that this critical policy making entity is losing an important contributor at a particularly-complicated policy juncture.
I have never met Mr. Stein in person, nor have I spoken to him on the phone. Also, I am far from an expert on his considerable work at Harvard and MIT, prior to him joining the Fed. But I have followed closely, and been impressed, by the perspectives he has brought to the institution during his two-year tenure.
As described officially, Mr. Stein has taken a lead role in the Fed’s work on regulation and supervision. In practice, he has also come across as bringing to the table a comprehensive understanding of financial developments — one that combines practical market and theoretical economic assessments with insights from both the efficient market literature and behavioural finance.
Mr. Stein will be best remembered for pointing out the risks that the Fed’s current policies potentially pose for financial stability, market functioning and the real economy. Moreover, in his notable February 2013 speech, he reminded us that:
“One of the most difficult jobs that central banks face is in dealing with episodes of credit market overheating that pose a potential threat to financial stability. As compared with inflation or unemployment, measurement is much harder, so even recognising the extent of the problem in real time is a major challenge. Moreover, the supervisory and regulatory tools that we have, while helpful, are far from perfect.”
Well-regarded Fed watchers were quick to point out yesterday that Mr. Stein’s absence may emboldened the doves on the FOMC. This could well be the case. If so, it would marginally reinforce the markets’ already-considerable appetite for down-in-quality trades, yield, and several other risk spread compression trades.
But there may be a bigger issue here.
With the departure of Mr. Stein, the Fed risks losing part of the internal cognitive diversity that — I believe strongly — is valuable for navigating the particularly unusual and complex policy outlook that it (and the country/global economy) faces.
Fortunately, some (though not all) of the loss would be offset as soon as Stanley Fischer — an even more-highly respected, well rounded and accomplished economist — finally completes his Senate nomination process. In the meantime, Fed officials would be well advised to use the next few weeks to become even keener students of Mr. Stein’s perspectives and insights.
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