According to the Wall Street Journal, President Trump informally polled GOP senators on Tuesday about their preferences for the next Fed chairperson.
It seems that the only candidates on the ballot were current member of the Federal Reserve Board of Governors, Jerome Powell, and Stanford University professor John Taylor, who also served as undersecretary of the Treasury for international affairs in the George W. Bush administration. Taylor apparently was the winner of this odd straw poll.
To say that President Trump’s methods of screening candidates for important government posts are unorthodox would be an understatement, so I will not pursue this head-scratching line of thought.
Even though the Federal Reserve plays a fundamental role in stabilizing our economy, and even though the Fed relies on a high level of public confidence to do its job well, we have another Trumpian circus.
If these two gentlemen are the actual finalists in Trump’s deliberations — and media reports suggest that there are others, including current Fed Chair Janet Yellen, still in the running — what might be at stake in the choice?
The Fed has two major areas of responsibility. The first is monetary policy, which involves managing interest rates and the money supply to achieve low inflation and a high level of employment. Congress has given the Fed a “dual mandate” in this area, charging it with achieving the lowest level of unemployment compatible with low inflation.
The dual mandate is notoriously vague, allowing a broad range of interpretations of the priority of lowering inflation versus lowering unemployment.
At this point, however, the U.S. economy is in the odd situation of inflation below the Fed’s 2-percent target coupled with unemployment that seems low but perhaps could be even lower. The Yellen Fed has tried to continue stimulating the economy, which would cause inflation to rise and unemployment to fall, but has slowly decreased the degree of stimulus.
The minutes from the most recent meeting of the Fed’s decision-making body, the Federal Open Markets Committee (FOMC), show the decision-makers puzzling over why the economy continues to respond tepidly to stimulus. Some members ask whether inflation might chronically stay below 2 percent. This would be a dramatic reversal of the Fed’s struggles with high inflation since the 1960s.
Taylor, a renowned academic macroeconomist, signed on to an open letter sharply criticizing the Fed for its bond-buying programs in 2010. The letter predicted that the massive increase in the money supply would cause runaway inflation.
As Paul Krugman, the equally renowned but ideologically opposed academic and columnist, acidly pointed out this week, Taylor has refused to acknowledge that this prediction was wrong. Bizarrely, he has actually attempted to defend it, even in the face of chronic low inflation.
To make matters even more curious, Taylor’s past comments and body of work suggest that he would want to raise interest rates much more rapidly than the Fed has thus far. This would hardly suit the president or congressional Republicans, since higher interest rates would make it considerably more expensive to increase the federal deficit.
In case readers had not picked up on this, after strident denunciations of deficit spending during the Obama administration, Republicans are now proposing deficit increases.
Even stranger, there is a real possibility that aggressive interest rate increases would throw the economy into recession. As New York Fed President William Dudley archly noted, expansions do not die of natural causes, they are killed by the Fed.
Do Republican senators and the White House want to appoint an expansion-killer to the Fed, or would Taylor actually change his tune if appointed?
The Fed’s other major area of responsibility is regulation of bank holding companies and playing a major role in keeping the whole financial system stable. Here, Powell, who has a background in the financial industry, would have an edge over Taylor in terms of expertise.
This is also the area where Republicans have a much clearer agenda. They seek to weaken the tough financial regulations of the Obama era. They won a first battle on Wednesday, when the Senate repealed a rule passed by the Consumer Financial Protection Bureau to outlaw financial institutions requiring customers to agree to binding arbitration. This was a significant victory for the industry, and a major loss for consumer advocates.
Presumably, either Powell or Taylor would support rollback of regulation. Taylor would be more of a change candidate, possibly using his famous interest-setting rule to make Fed monetary policy more automatic and predictable. This has been a favorite theme of conservatives for decades.
The appointment of Powell would be more of a status quo move. It is not entirely clear what would change if Powell were to replace Yellen; most likely, the main difference would be a more industry-friendly approach to regulation.
As the extended deliberation process continues, it would be pretty difficult to say that we are reaching much clarity about what the administration plans for the Fed. All we can do is wait for the next episode of the “Central Bank Apprentice.”
Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.