The New Keynesian' Fed

The U.S. central bank’s new leaders developed an economic model from the inflation lessons of the 1980s. But is it right for today?

- Matthew Boesler

About 18 months before U.S. President Donald Trump nominated him to the Federal Reserve’s Board of Governors, Marvin Goodfriend told an audience that his own family had been the victim of bad economic policy.

His father had accumulated most of his savings in the 1970s before retiring in 1984, the Carnegie Mellon economics professor recounted at the May 2016 panel discussion in Amelia Island, Fla. The savings dissipated so quickly, Goodfriend said, that his mother wondered if her husband had a secret family on the side.

“He had all his money in government bonds, and the nominal value of government bonds was such that his savings were wiped out by inflation over a decade,” he said. “The reason it’s so hard for savers to get protection is because governments have been irresponsible about either their monetary systems or other things, and I think we need to start there.”

Along with data, calculations, and theory, personal experiences can play a formative role in the worldview of policymakers. For Goodfriend, 67, and others in his generation, the double-digit inflation of the late 1970s and early 1980s—and the Federal Reserve’s war to tame it—had a profound impact on their vision of responsible government.

Goodfriend’s economic philosophy is, in large part, shared by fellow Federal Reserve Board nominee Richard Clarida, 61, Federal Reserve Bank of New York President John Williams, 56, and even Fed Chairman Jerome Powell, 65. One defining ethos of the “Trump Fed” so far may be the conservative, inflation-centric “New Keynesian” economics that Goodfriend, Clarida, and Williams helped formulate.