Consensus Difficult in the US Federal Reserve

A leading Israeli American economist contrasts the economies of her two countries. She delineates the dilemma of the Federal Reserve. Raising interest rates too fast could push the economy into recession while acting too slowly could fail to curb inflation.

Federal Reserve building in Washington, DC., in the Spring © Thomas Barrat /

October 18, 2022 07:37 EDT

Professor Naomi Feldman has served at the highest levels of government both in the US and Israel. During the initial phase of the global COVID-19 pandemic, Benjamin Netanyahu, the then Israeli prime minister, turned to her for advice and even thanked her publicly during a speech the very same evening.

Feldman, the mother of four, is an associate professor of economics at the Hebrew University in Jerusalem and serves on the Bank of Israel’s Monetary Committee where she’s a voting member. “I enjoy being able to balance between policy and academia. Policy can be frustrating and messy whereas academia enables me to study ‘the best ideas’ on how to tax people and raise revenue,” the professor explains. “I am very busy,” she says with a laugh, as her youngest daughter, age 7, pops in the room during our Zoom interview, asking for mommy.

In a wide-ranging interview, Feldman emphasizes that her analysis is her own as an academic and does not necessarily reflect the position of the Bank of Israel. 

Uncharted territory during COVID-19

“During the COVID era, no one knew what needed to be done,” Feldman explains as she recalls her many meetings with Finance Ministry officials debating what kind of assistance the government should be providing people and businesses. “A lot of decisions were made quickly,” she says. 

Feldman recommended more spending at that time to mitigate a recession. During her meeting with Netanyahu, Feldman brought up examples of how other countries were using one-time grants to help out the populace during economic downturns. “He latched onto the idea and loved it,” Feldman recalls. 

After Netanyahu accepted her policy recommendations and publicly acknowledged her advice, Feldman had her “two weeks of fame,” she says with a laugh, as the Israeli media and policy community sought her fiscal and monetary expertise during a time of crisis. 

In July 2020, Netanyahu provided his pandemic-era rescue package. In it, one-time grants of roughly $220 per adult and $150 per child were provided to all eligible citizens. “A family of four  received roughly $740, nearly 18% of median monthly household income in 2018. By early August, the government disbursed the payments, arguing that the grants would provide much-needed stimulus to the domestic economy. The government further encouraged the public to go out and spend on domestically produced goods and services,” according to a paper published by Feldman and Ori Heffez.

Prior to immigrating to Israel in 2018, Feldman served as the principal economist at the Board of Governors of the US Federal Reserve System, which she joined in 2011. From 2017-18, she served on the Council of Economic Advisers (CEA), reporting directly to the US president. 

During Feldman’s tenure at the CEA, she was able to evaluate President Donald Trump’s tax reforms, which was an “exciting experience” she says as the last time the US carried out extensive tax reforms was in 1986 during the presidency of Ronald Reagan. “At the CEA, I was able to participate in the debate over the best policy options on taxation and what’s politically feasible,” the professor recalls.

Israel’s resilient economy

Israel is often referred to as “a small and open economy.” While the US, the UK and other European economies are struggling with record inflation, Israel is managing well given the global circumstances. The Jewish state, despite recent strong economic growth, however, is nonetheless feeling the inflationary pressure stemming from the US and Europe through the purchase of imported goods, the professor explains. “The movement on inflation rates can have a large impact on Israel, but Jerusalem  is nonetheless in a good position as Switzerland and Japan are the only Organization for Economic Cooperation and Development (OECD) countries with lower rates.” 

Policymakers at the Bank of Israel, where Feldman serves, have the option to increase interest rates should the situation require it, she says but doesn’t divulge what comes next. “ The Israeli economy is in a strong shape coming out of the pandemic,” she explains.

Feldman attributes the strong fundamentals of the Israeli economy to painful lessons learned during the 1980s when the country suffered from hyperinflation. “In the 1990s, Israel took critical steps to address public debt and the deficits seriously,” Feldman says. Over the ensuing three decades, Israel has managed its economy well. “In Israel, there’s a strict belief that deficits cannot grow out of control, which is why its economy continues to perform well.”

Providing an insider’s account, Feldman says that the de facto “separation” between spending-inclined politicians and bureaucrats at the Ministry of Finance – “who control the money” – is what maintains in practice the country’s fiscal discipline. “It is the bureaucrats who prevent the spending from spinning out of control,” she says as Jerusalem tries to keep its debt at around 60% of GDP. “This policy provides Israel with the fiscal space to act when required as it has managed its economy well.” 

The Israeli economy, however, does face a degree of uncertainty stemming from the upcoming elections in November as the apparent never-ending election cycle has prevented the government from consistently setting longer run budgets. “The lack of a stable government contributes to the economy’s uncertainty as well as those stemming from geopolitics,” Feldman says, referring to the volatile politics of the broader Middle East. “All considered, Israel is doing well.”

All is not, of course, rosy in Israel as the cost of living is very high, which is one of the most important issues facing the government, Feldman argues. 

The US faces difficulties

“The US economy is in a very difficult position. Right now, we’re witnessing the consequences of what happened during the pandemic when generous stimulus checks were provided to Americans and businesses.” The professor believes that the next half year will be instrumental in determining whether inflationary pressures will stabilize or continue to grow. The US is at a fork in the road,” she explains but cautions that, “if anything, inflation will be a longer-term problem than initially thought. It may even last for one or two years.”

“Lockdown in China is not the entire story as the Federal Reserve is assessing what needs to be done when it comes to tackling the inflationary pressure,” she says. Referring to a recent address by Jerome Powell in Jackson Hole, Wyoming, where the chair of the US Federal Reserve declared that the American central bank will continue to raise interest rates in order to tame surging inflation. 

In the meantime, Feldman predicts that “there will be less consensus” among policymakers on how to move forward. “There will be tensions between the more hawkish Board members and those who prefer to take a more cautious approach. Policymakers don’t want to go too hard too fast as it could plunge the economy into a recession.” This is where the current debate lies, Feldman explains. Another dynamic contributing to inflation is, of course, the war in Ukraine and its impact on global energy prices.

The U.S. economy faces additional pressure points as the country  is still  coming out of the pandemic. Labor shortages and mismatches in the labor force (the skill set that jobs require are not those necessarily held by people who are looking for jobs) contribute to the economic uncertainties, she explains. Cultural and political tensions, along with inequality that was exacerbated by the pandemic, are factors as well.[This article was first published by Man & Culture magazine. Sigurd Neubauer is the publisher of Man & Culture.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.


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