Oh, to have been a fly on the wall during Janet Yellen’s job interview with Donald Trump on Thursday. Did he apologize for accusing her, during his campaign, of keeping interest rates low to make his loathed predecessor, Barack Obama, look good? Did he thank her for helping stock markets hit all-time highs (something he likes to take credit for himself, mind you)? Did he try to get her onside with his fantasy of three-, or four-, or five-, or maybe six-per-cent sustained GDP growth? Did he ask her, as he allegedly did onetime FBI director James Comey, for her loyalty?
Yellen’s tenure as chair of the Federal Reserve ends in February, and she is reportedly on the shortlist of five candidates the president is considering for the position of the most economically powerful person on the planet. Trump had reportedly already met the other candidates by last Thursday — Yellen was the last. We will probably never know the details of their exchange, not that it matters much. I suspect that even Yellen left the meeting with no more idea of whom Trump will pick than the rest of us do.
Which is to say, no idea.
This is, after all, the way Trump handles the communication of decisions. Maybe it’s a habit he picked up from his reality-show days, but he likes to keep the audience guessing till the last moment, whether it’s the fate of U.S. participation in the Paris Climate Accord, his choice of cabinet secretaries, his real intentions around NAFTA (will he stay or will he go?), or, yes, which brainiac he wants as the next Fed chair.
Of course, economists’ polls and foreign exchange markets are busily trying to handicap the outcome. Right now, it looks like Fed governor Jerome Powell, a Republican lawyer and former investment banker, is the front-runner, followed by former Fed governor Kevin Warsh, another lawyer and investment banker; Yellen, the incumbent, who has a PhD in economics from Yale; Stanford University’s John Taylor, the only other economist in the running; and Gary Cohn, Trump’s economic adviser.
The issue that probably matters most is whether Trump will make a change — that is, not give Yellen another four-year term. The little issue of her being an Obama appointee, not to mention a Democrat, certainly works against; also, given his criticism of her during the campaign, keeping her on might hurt him among his core voters. Still, there’s a good case to be made that he should renew Yellen’s chairmanship.
For one thing, the economy is doing pretty well. Unemployment is at or near all-time lows, and GDP growth is hardly stellar but solid. Politically, Trump has a host of other things to worry about — Obamacare, tax reform, congressional obstreperousness, Russia-gate, and on and on. So if the Fed ain’t broke, why try to fix it? More importantly, the Fed has (at long last) undertaken the delicate process of normalizing rates and reducing its QE-bloated balance sheet; keeping Yellen would not only help ensure that process goes according to plan, but also communicate a stable hand on the economic tiller.
Then again, Trump has never been one who seems to care much about stability, which suggests he could give her the heave-ho. His apparent need to “shake things up” might also work against Powell, another Obama appointee, though a Republican, who has been aligned with Yellen on interest rate policy in the past. On the other hand, he leans more in favour of financial deregulation, and the Trump administration has yet to see a rule it didn’t want to undo. Still, after Yellen, Powell would be the safest choice.
Appointing Warsh or Taylor would be a more radical move. Both are considered hawks, so investors could expect tighter monetary policy more quickly. As a Fed governor in the late 2000s, Warsh sounded the alarm about rampant inflation (which didn’t materialize) and spoke out against quantitative easing (though he voted for it) even as unemployment was running around 10 per cent. Taylor, meanwhile, supports rules-based monetary policy; in the 1990s, he developed a formula, named after him, for determining benchmark interest rates based on inflation and real GDP. Such an approach might hinder the Fed’s ability to respond to changing conditions; it would, however, give markets a more transparent view on where policy is heading.
Finally, appointing Cohn might be a convenient political move, in that it would spare Trump from having to fire him. The President was reportedly outraged when reports surfaced that his economic adviser, a prominent member of New York’s Jewish community, considered resigning over Trump’s response to the white supremacist march in Charlottesville. Still, Cohn has hung in there, dutifully supporting Trump’s skeletal tax-cut plan. Academically, he is the least qualified of the candidates, though he has lots of Wall Street experience as former president of Goldman Sachs. And anyway, Trump in his other appointments hasn’t seemed to care too much about credentials.
As it stands, the question of who will be the next Fed chair is unanswerable. The most Trump has said about the contenders is that he “likes them all.”
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