Kelly Evans: How do you “fix” the Fed？

The irony of having this whole discussion right now about how to “fix” the Federal Reserve is that the critics have actually gone pretty quiet lately.

“We must give credit where credit is due: after a significant inflationary policy error during 2021 and early 2022, the Powell-led FOMC has effectively nailed the immaculate disinflation/soft landing,” Roth MKM economist Michael Darda wrote in late May. That achievement, he added, is “something unprecedented after more than a two-year inflation surge.”

Similar acknowledgements are being heard from investors and money managers. “The Fed is actually doing a pretty good job right now,” Andres Garcia-Amaya of Zoe Financial told us on air last month. “The market's at all-time highs, inflation is below 3%, and the economy is doing just fine.”

Which is partly why the market gets so jittery about Fed Chair Powell's potential replacement now, whenever the issue is raised.

But even those who critical of Fed policy right now are critical in both directions: some, like Barry Knapp of Ironsides Macro, think they are running policy too tight and should cut rates; and others, like Larry Lindsey, warn rate cuts would be a mistake if inflation rises towards year-end.

The larger issue, as Lindsey discussed on our show earlier this week, is how to make the Fed less error-prone in general. Even excluding Covid, the Fed's growth forecasts have been off by 63% on average, he noted. If the Fed instead had simply assumed 2% annual GDP growth over the past fifteen-plus years that they've been issuing projections, they would have been much closer to the mark.

And the Covid episode itself--when inflation hit 9% before the Fed finally began hiking dramatically--remains a major point of concern about the institution's lack of intellectual diversity. The Fed's hundreds of economists and staffers are too one-sided, according to Lindsey, because they are hired from a small handful of “elite” schools.

Not only should that be broadened, but the board itself, which decides monetary policy, should have at least a couple of non-economists from the business world, he added.

Those are not the kinds of changes that would necessarily unnerve markets. In fact, such ideas might even be as part of a message that says the new Fed chair isn't just coming in to run policy more loosely at the margin. Otherwise, the market is left to conjecture about just what exactly the new Fed chair's plans for monetary policy or institutional change might actually be.

Some more specificity on both fronts could go a long way towards keeping the current positivity about the Fed going, for once.