The Federal Reserve has no shortage of critics who believe it has, in some way, bungled its statutory duties, but few have the opportunity — and fewer still the audacity — to tell the principals of the central bank as much to their faces.
On April 5, in a nondescript conference room in midtown Manhattan, a small group of economists did just that, picking apart the Fed's approach to monetary policy and regulatory reform, even questioning the Federal Open Market Committee's intellectual diversity and monetary economic acumen, all while a Fed governor sat in the audience mere feet away.
The group calls itself the Shadow Open Market Committee, and it is no stranger to challenging the Fed's orthodoxy. In fact, it has been doing so for more than 50 years.
Jeffrey Lacker, former president of the Federal Reserve Bank of Richmond and a member of the SOMC, said the organization views holding the Fed "intellectually accountable" as one of its core missions, noting that lawmakers on Capitol Hill alone are not equipped for the task.
"Monetary economics is tricky and challenging. Congress really needs the help of monetary experts to understand and evaluate what the Fed's doing, how it could have been doing things differently and whether its actions and strategies could be improved upon," Lacker said. "Without some formal mechanism for that expertise to be brought to bear in Congress, the SOMC essentially got together and volunteered to provide it, both for the benefit of Congress and for the benefit of the public."
The group is composed of 11 economists with doctorates specializing in monetary policy.
Three of its members — Lacker, former Philadelphia Fed President Charles Plosser and former St. Louis Fed President Jim Bullard — have cast votes on the FOMC. Others have advised the Fed Board of Governors, regional reserve banks and/or other central banks around the world. The rest have held prominent research positions in academia or the private sector.
Members of the Shadow are well known in their fields and their work is highly regarded. Earlier this year, former Fed Chair Ben Bernanke cited a paper written by three SOMC members — Michael Bordo, Mickey Levy and Andrew Levin — in his review of the Bank of England's monetary policy framework.
"Monetary policy is too important, what the Fed does is too important. It affects the public, it affects the economy, it affects the markets, it affects the banks, it affects Wall Street and Main Street. It's just too important, and we need serious watchdogs to be taking a closer look at it."
"These are people who have had very deep policy experience, not just the regional Fed presidents, but also former staffers who know where all the bodies are buried, so to speak," said Derek Tang, co-founder of the Washington, D.C.-based research firm Monetary Policy Analytics. "These are people that, even outside the context of the SOMC, have proposed reforms that have been really sharp in saying what they think is wrong with how the actual committee is going about its business."
Yet, despite the heft of its members, the SOMC itself has a relatively low profile, scarcely reaching beyond the most devoted consumers of economic analysis. "The committee is the strongest it's ever been," said Levy, who has been with the SOMC since 1983. "But it doesn't get the attention that it should."
That has not always been the case.
A storied past
The SOMC was established in 1973 by renowned monetarists Karl Brunner and Allan Meltzer, along with the support of economic heavyweights such as Anna Schwartz of the National Bureau of Economic Research — and a close collaborator of Milton Friedman — in response to rising inflation and what they saw as the Fed's reluctance to take accountability for it.
"You had a Fed chair at the time, Arthur Burns, who really didn't believe in monetary policy," Levy said. "He was one of the architects of wage and price controls, which … ended up being one of the most disastrous economic policies in U.S. history."
Meltzer, Brunner and their colleagues banded together to argue against the use of price controls and emphasized the importance of curbing the growth of the money supply.
At the time, the tenets of monetarism were relatively unheard of. The Fed itself was a mystery, even within the financial sector, as its policy moves went unannounced and scarcely detected.
Yet, the SOMC was able to drum up support for its arguments by writing policy papers, drafting statements and, critically, hosting meetings to which it invited reporters from the nation's top newspapers. Those reporters put the group's ideas in front of executives and policymakers.
Bordo, a longtime SOMC member and the director of the Center for Monetary and Financial History at Rutgers University, said the SOMC cannot take sole credit for the monetary policy revolution of the late 1970s, which was orchestrated by then-Fed Chair Paul Volcker. But, he said, it contributed to the environment that made it possible.
"The noise that came from this group was quite significant, as was the fact that the business community knew about it," Bordo said. "This was part of the pressure that was put on the Fed in the '70s to start reversing its policies."
A shadow, not a mirror
Unlike, say, the shadow cabinet of the U.K. parliament, which the opposition party runs as a direct parallel to the governing party's top officials, the SOMC has never sought to match the FOMC one-to-one.
It holds two meetings a year instead of eight and it does not suggest a policy rate or make economic projections. For many years, it put out a statement at each meeting, but decided to discontinue the practice in the mid-aughts.
Bullard, who joined the SOMC this year, said the group would rather spend its limited time and resources on big picture thinking than trying to completely mirror the Fed.
"This is a good forum for a little bit deeper issues and more strategic issues about monetary policy, generally, and direction, more than decisions on a particular day," Bullard said.
The SOMC favors a systematic, "rules-based" approach to monetary policy. It also frequently raises concerns about the Fed's balance sheet and the evolving scope of the Fed's mission. Over the decades, SOMC members have also branched out beyond the Fed's remit, exploring oil shocks, exchange rates, presidential agendas and fiscal policies, among many other topics.
"In the old days of the Shadow, all the members basically abided by the single thrust of Allan Meltzer on money," Levy said.
"Since then, as the issues of monetary policy have broadened in dimension, the people who have joined the Shadow have different interests and they've broadened, too," he added.
Is anybody listening?
For all its efforts, it is unclear how exactly the SOMC has influenced economic policy in recent years.
Tang said this same can be asked of all think tanks and the answer is rarely straightforward. Research begets more research, and often that research is picked up by staffers and incorporated into legislation, he noted, though such movement of ideas can be hard to trace.
"It's a very big ecosystem of how policy ideas are debated, affected and possibly even generated," Tang said.
The big question for the SOMC is whether or not its ideas are reaching their intended targets at the Fed, which employs legions of its own economists, researchers and lawyers to craft its policies.
Levin, who served as a staffer for the Fed Board of Governors for two decades, believes the SOMC's messages largely fall on deaf ears at the central bank.
"The frustrating part of being an external voice outside the Fed now is … it seems very difficult to say anything or write anything that will really make a dent in the Fed's views," he said.
Bullard, on the other hand, said he paid attention to what the Shadow had to say when he was with the Fed, and he believes there are ways in which outside ideas can reach the Board of Governors, too.
"It's a marketplace of ideas," Bullard said. "The reserve banks are one avenue for getting different ideas into the discussion … and then I think the Shadow Open Market Committee is just another place to possibly inject new ideas into policymaking or emphasize older ideas that might have become more salient in the current situation."
Other Fed officials have also endorsed the SOMC's policy chops. At the April meeting, Fed Gov. Michelle Bowman heaped praise on the organization despite its critiques of the Fed.
"The SOMC has a very distinguished reputation for fostering substantive analysis and debate regarding independent, transparent and systematic approaches to central bank policymaking," she said.
Similarly, then-Cleveland Fed President Loretta Mester delivered the keynote address at the group's October 2016 meeting, at which members lamented the Fed's failure to stimulate the economy and the riskiness of its balance sheet expansion.
"Over the years I have learned a lot from the position papers and conferences they've put together," Mester said. "It's a very serious group of economists and I do share with them the view that the active exchange of diverse ideas and careful deliberations ultimately result in better policy decisions."
Tang noted that the Fed officials who have gravitated to the SOMC are those that are more hawkish on inflation, willing to cast dissenting votes or are otherwise independently minded.
'Ragtag' or 'professionalized'?
Whether the SOMC can break through to a broader swath of Fed decision-makers will be put to the test next year, when the central bank engages in its planned review of its monetary framework. But doing so will require the Shadow to overcome a hurdle it has struggled to clear in recent years: making its voice heard in an increasingly noisy conversation.
"We don't think we're getting out the message as much as we'd like to," Bordo said. "We don't think we have the audience we had 50 years ago."
Not only has the media landscape changed, but the conversation around the Fed has, too. As the institution has become more transparent, more outlets and individuals are able to discuss the Fed's actions. The challenge is not only to have the proper analysis, but to also make it stand out.
Bullard said steps could be taken to "professionalize" the organization, to make its conferences bigger and to engage with officials from the Fed Board of Governors in a more collegial manner. He pointed to The European Central Bank and its Watchers, the SOMC's European counterpart, which had ECB President Christine Lagarde deliver a speech at its conference in March, as an organization worth emulating.
"That might become a model for a more modern version of the Shadow Open Market Committee," he said. "It's not quite the ragtag, confrontational group that you would have had in the 1970s in the U.S., but instead a forum to talk about current issues in monetary policy."
But the ragtag spirit has never quite left the organization. Unlike other think tanks, which are well funded and pay comfortable salaries, the SOMC is a volunteer organization. New members are added by invitation and are subject to the vote of the rest of the committee. Its sole sponsor, the Manhattan Institute, provides a space for events and covers travel costs for members. As a result, the New York-based libertarian group has little say over the Shadow.
Judge Glock, director of research at the Manhattan Institute, said the longevity of the group is a testament to its own force of will.
"It's a group of people who fundamentally care about the issues they discuss," Glock said. "They've largely been able to do that due to their own passion and dedication to this project. That's been crucial in keeping the SOMC moving over the decades."
For some members of the Shadow, the principles they defend are too important to back down from, even if it means fighting their battles uphill.
"Monetary policy is too important, what the Fed does is too important. It affects the public, it affects the economy, it affects the markets, it affects the banks, it affects Wall Street and Main Street," Levin said. "It's just too important, and we need serious watchdogs to be taking a closer look at it."
