WASHINGTON, Aug 8 (Reuters) - Having railed against the "revolving door" between the executive branch and the U.S. Federal Reserve, Council of Economic Advisers Chair Stephen Miran may now be walking through it after President Donald Trump nominated him to the Board of Governors of an institution Miran would like to radically overhaul.
In a report last year co-authored by Miran for the Manhattan Institute, the economist proposed harsh medicine for a series of ills he felt had infected the central bank, from "groupthink" on monetary policy, to regulatory overreach, to poor accountability and a loss of focus on its core mission of fighting inflation.
It was one of two big-think ideas Miran floated last year, along with the so-called Mar-a-Lago accord for devaluing the dollar and restructuring U.S. debt, a proposal that quickly fell into disfavor and was criticized as putting the dollar's global reserve status at risk.
His views on the Fed might also be a hard sell.
He has argued that the Fed's touted independence has left it unaccountable and ineffective and that it would be better served by a new system where presidents could fire the seven members of the Washington-based Board of Governors at will.
To counter that presidential power, authority over monetary policy would shift to the 12 regional Federal Reserve banks, whose leaders would all vote on monetary policy and thus be able to outvote the Board, and whose oversight would come under the control of state governors.
Instead of a system insulated from politics it would be a system fully infused with it, but in a form of "monetary federalism" Miran argues would increase accountability.
Whether that flies with U.S. Senators who have to confirm Miran's selection and who are already on edge about Trump's attacks on the Fed, remains an open question, as does the verdict of global bond markets concerned about the ability of a politically captive central bank to control inflation. Long-term Treasury yields and the interest rate on inflation-protected bonds rose slightly in the hours after Miran's nomination was announced. Expectations of a quarter-point cut at the Fed's September and December meetings changed little.
To Miran, the current set-up at the Fed has merely excused what he regards as poor performance.
"Accountability has been absent...Poor policy decisions do not necessarily result in consequences for Fed leadership," Miran wrote with co-author Dan Katz, currently the chief of staff to Treasury Secretary Scott Bessent, citing episodes including the recent outbreak of inflation, the failure of Silicon Valley Bank, and the asset purchases first conducted more than a decade ago under former Fed Chair Ben Bernanke. A response to a deep global financial crisis and the fact that the economy was ailing despite interest rates cut to near zero, Miran said the bond buying, meant to hold down long-term interest rates and now a staple tool among global central banks for certain crisis conditions, was wrong because it "distorted the allocation of credit."
A SINGLE VOICE
Trump nominated Miran on Thursday to fill a seat vacated unexpectedly by Adriana Kugler, who leaves the Fed on Friday to return to a teaching post at Georgetown University.
The most fundamental changes Miran proposed would take an act of Congress, and are considered unlikely. The current system, solidified in the 1930s, was meant to limit White House influence over interest rates, and some key Republicans have spoken up for that principle in the face of Trump's attacks on current Fed Chair Jerome Powell.
Even for internal budgeting or staffing reforms, Miran for the moment would be just a single voice on a seven-member board and, for interest rate decisions, a single voice on a 12-vote policy committee that includes five voting members from among the Reserve Bank presidents.
But with the potential to be appointed to a full 14-year term next year, or even be elevated to the chair, Miran, if confirmed by the Senate, also becomes the most direct line into the Fed for the current Trump administration, which has been pressing for steep rate cuts and pressuring Powell to resign before his term as the top policymaker ends in May.
His views on presidential authority over the Fed could therefore take on new importance, particularly if others among the current board members, including three Biden-era appointees, resign and give Trump more openings to fill. Powell's seat would be a fourth, unless he opts to remain on the board until 2028 after his term as chair ends in May.
If the aim is to acquire four seats on the board and put reforms into place "it is skiing further down that slope" of the Fed losing its independence from the executive branch, said Ellen Meade, a former top adviser to the Fed's board and now a research professor at Duke University. "They want a mouthpiece. They want to stir things up. And that is concerning."
Miran's report touches on issues familiar in conservative critiques of the central bank, and in some cases are being addressed already by the Fed itself.
A new framework for managing inflation adopted in 2020, criticized by Miran for its "hubris," quickly became passe when inflation rose during the pandemic and is likely to be discarded in an upcoming strategy revision.
Fed Governor Christopher Waller, also in the running as a possible next chair, has been internally critical of Reserve Bank presidents straying into political and social commentary, and worked with Powell on plans to curb staffing, which is due to fall 10%.
But all of that stops short of what Miran envisions, including stripping the Fed of its autonomous budget authority and making that part of the congressional appropriations process.
And while lamenting "highly political personnel" moving freely between the White House and the Fed's Eccles Building in a journey he is now poised to take, Miran wrote there was no point pretending there were no politics at the Fed. "Political motivations will always exist," he said. The key is "to provide mechanisms to block them from unduly affecting policy."
Reporting by Howard Schneider; Editing by Daniel Wallis and Andrea Ricci
