The Corner

Monetary Policy

Thomas Laubach Was Our Star at the Fed

(Willard/Getty Images)

Thomas Laubach, the director of the Federal Reserve Board’s Division of Monetary Affairs since 2015 (appointed by then Fed chair Janet Yellen and had since continued to advise Chair Powell through the current COVID-19 recession) sadly passed away this week, at age 55, after a battle with pancreatic cancer. If you never heard of him, he was probably the most influential macroeconomist you hadn’t heard of who had an enormous impact on your life vis-à-vis central bank interest-rate policy, not only at the Fed in the U.S. but around the world.

He was also particularly known for co-developing with John Williams, the current president of the Federal Reserve Bank of New York, a measurement of the neutral rate of interest (commonly known as “R-Star”) which came to be famously known as the “Laubach-Williams” neutral rate of interest. The neutral rate can be thought of as the level of interest rates at which inflation would neither increase or decrease if a given central bank was to keep their benchmark interest rate at that level.

The Laubach-Williams model, which first appeared in an academic paper published in the early 2000s, quickly became the most used measurement of R-Star not only at the Federal Reserve but also at central banks around the world. Such a model guided the path of interest rates set by the Fed over the past two decades (including the Fed keeping interest rates at zero for much of this time) which in turn affected the interest rate on mortgages, auto loans, corporate bonds, and Treasury bonds, in all representing trillions of dollars of principal.

Some economists have had various squabbles writing with the Laubach-Williams estimates including the size of the standard errors (the area of which they could potentially lie given statistical uncertainty). However, Thomas was always very kind to everyone and nice even to his harshest critics. He always made time for those junior and new to the economics profession, not just for central bankers who frequently sought his input.

Laubauch also co-authored the highly influential 2001 book, Inflation Targeting: Lessons From The International Experience, with Ben Bernanke, Frederic Mishkin, and Adam Posen, which helped pave the way for central banks around the world to more seriously adopt inflation targeting and for the Fed to formally announce its 2 percent inflation target in 2012. Central bank inflation targeting, which Laubach is partially responsible for, is widely credited by economists for keeping prices stable over the past few decades.

I am confident that many academics, Federal Reserve System employees, and Federal Reserve alumni (including myself) will miss him, remember him fondly, and hold many conferences in his honor.

Jon Hartley is a master’s student at the Harvard Kennedy School and a Visiting Fellow at the Foundation for Research on Equal Opportunity. He formerly served as a senior policy adviser to the Congressional Joint Economic Committee.

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