An Overview on The Federal Reserve and Nellie Liang

By Aadhavaarasan Raviarasan

In September of 2018 President Donald Trump nominated Nellie Liang - a Senior Fellow at the Brookings Institute, longtime Federal Reserve staff member who is an expert on financial regulation, and holder of a Phd in economics from the University of Maryland -  to the Federal Reserve Board. To grasp the impact of this nomination, one must first understand primary function of the Federal Reserve: the raising or lower of interest rates.

Every quarter (three months), the Federal Reserve (the Fed) decides whether to raise or lower interest rates. When the Fed raises interest rates, it decreases the amount of money in the economy, making each dollar more valuable, which increases the prices of goods across the economy. The Fed employs this strategy during times of prosperity to prevent runaway inflation, which occurs when there is an abundance of supply (too many investments are being made) that diminishes the worth of each dollar, generating massive price increases across the market. Runaway inflation is especially harmful when price growth outpaces wage growth. When the Fed decreases interest rates, it increases the amount of money in the economy, making each dollar less valuable, generally increasing prices in the economy. This is done in times of economic downturn in order to revive the economy, since this provides extra monetary resources to invest and jump start the economy out of rock bottom.

The nomination of Ms. Liang into the board grants her the power to decide the direction of monetary policy - determining if interest rates are raised or lowered and by how much - giving her plenty of power on the direction of our economy.

Insofar as she about to gain a massive amount of power, it is probably important to identify exactly who Ms. Liang is and what she specifically intends to do with her power. Liang’s first position of prominence was as the premiere head of a new division created after the 2008 financial crisis research financial stability issues. Ms. Liang’s position on monetary policy is one geared towards harsh restriction. Indeed, she advocates against the dropping of interest rates in order to recover the economy - believing that the markets ought to recover themselves with no help - and the raising of interest rates in order to curb excesses in the market. Indeed, her ideology on the economy has 2 key central tenants, (1) the establishment of a strong regulatory framework, and (2) early and decisive action to any market shifts.

Moreover, she also believes that, based on our current track, a “recession which will be severe” is bound to occur. In order to deal with this, Liang has supported raising interest rates in order to act as more ammo to drop interest rates by massive amounts upon the onset of the crisis. However, while these may be her set positions towards monetary policy as of right now, Liang is known for having a strong appetite towards risky policies, willing to deal with uncertainty when new problems pop up.

Her position is consistent with the current track of the Federal Reserve, which has been dramatically surging interest rates in this current time of economic prosperity. Her reinforcement of this policy has two possible implications. The first possible implication hinges on the Federal Reserve’s predictions being correct; if it is right that the economy is seeing strong growth and and unemployment reduction, it will continue taking the appropriate stance of raising rates, keeping the economy stable. In this scenario, the nomination of Ms. Liang proves beneficial in that it maintains current policy.

The second possible implication will occur if the Fed’s predictions are inaccurate. If the economy is not as strong as they think it is, then the raising of interest rates will only reduce the necessary supply of money to maintain job growth. The logic is simple: if a business is not doing super well, then reducing the amount of money it has decreases its resources to hire or invest. This can send a struggling or even stagnating business past the brink of survival, causing a chain reaction of bankruptcy and corporate collapse that could potentially end in recession. In this scenario, the nomination of Nellie Liang proves to be a disastrous choice, locking in a policy that will only end with the collapse of the American economy.

Which scenario is correct? Well, no one knows. The Fed itself struggles with uncertainty in determining the optimal time to raise interest rates and how far the economy can go without devastating inflation. It can only estimate, predict, and hope, which is why raising interest rates always hurts someone. All things considered, including her experience and credentials, Ms. Liang is a good pick for the reserve: if we have to choose someone to make predictions, we should choose an expert.

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