A new Fed chair could upend more than just the central bank
The Washington Post; Washington, D.C. [Washington, D.C
Replacing Yellen could mean big changes for central bank, economy
Trump is threatening to upend decades of consistency at the Federal
Reserve as he prepares to pick its next leader, narrowing a list of
final candidates to include people who could take the powerful central
bank in a radically different direction.
Trump is considering two
fierce critics of current Fed Chair Janet L. Yellen for the role -
Stanford University professor John Taylor and former Fed governor and
Republican economic official Kevin Warsh - both of whom have spent years
attacking the Fed's approach to keeping interest rates low in the hope
of stimulating the economy. If selected, either could move to raise
interest rates faster, which could rattle markets.
Republican lawmakers, particularly in the House, are lobbying the White
House to appoint Taylor, a longtime hero in GOP circles, according to
three people familiar with calls and discussions who were not authorized
to speak publicly. Vice President Pence also likes Taylor, according to
several White House officials not authorized to speak publicly. On
Friday, the Wall Street Journal editorial page endorsed choosing Taylor
But Trump is also contemplating keeping Yellen, with
whom he met this week. Unemployment has fallen to a 16-year low during
her tenure. Top White House economic adviser Gary Cohn and current Fed
governor Jerome Powell, a Republican, are also on the president's
shortlist for the job.
Many on Wall Street argue that what is
needed most right now at the Fed are continuity and low rates. Treasury
Secretary Steven Mnuchin, a former Goldman Sachs executive, is pushing
Powell as an option that would allow Trump to keep the Fed on a steady
and familiar course without reappointing Yellen, a Democrat, according
to several people close to Mnuchin who spoke on the condition of
anonymity because they were not authorized to discuss the internal
Trump said Friday that "it is in my thinking" to
appoint both Powell and Taylor to the Fed, although he did not say which
one he would pick for the top post. "They're both very talented
people," Trump told Fox Business in an interview.
House, which has confirmed the list of five finalists, says Trump aims
to announce a nominee before he leaves for Asia on Nov. 3.
decision could have wide ramifications for the economy - and politics.
Changes in Fed policy can affect growth and markets, sometimes in
unpredictable ways. The selection of a Fed chair also comes in the midst
of debates on Capitol Hill over an overhaul of the tax code. Alan
Greenspan famously broke with the Fed's tradition of staying out of
politics to endorse George W. Bush's tax cuts in 2001, lending his
imprimatur to the effort.
Yellen's tenure, like that of her
predecessor, Ben Bernanke, has been marked by unprecedented efforts to
fight unemployment and stimulate economic growth in the aftermath of the
2008-2009 recession. Yellen continued a trend of holding interest rates
at historic lows for nearly a decade and even employed
never-before-used monetary maneuvers in an effort to accelerate the
Warsh and Taylor argue that Yellen has gone too far in
pushing for economic stimulus, saying she has left the United States
vulnerable to the type of out-of-control inflation it faced in the 1970s
and early 1980s. If Trump tapped either for the job, the new chair
would probably push the Fed to raise interest rates much more quickly to
limit the risk of inflation, a move that could startle markets and
potentially slow the economy.
Appointing one of them would be a long
break with tradition, as sitting Fed chairs have been reappointed by
presidents of opposing parties ever since Ronald Reagan did so with Paul
Volcker, a Jimmy Carter appointee.
"She's done a magnificent
job," said Allen Sinai, president of Decision Economics and a longtime
adviser to both political parties. "The main problem is she is not a
loyal Republican. Janet is a liberal Democrat. She doesn't hide this."
in the GOP say the Fed is playing too big of a role in the economy,
especially considering Yellen and Bernanke took the Fed's assets from
$900 billion to $4.5 trillion today.
"I would want someone who is
explicit about ditching the framework they are operating under now,"
said Norbert Michel, director of the Center for Data Analysis at the
conservative Heritage Foundation.
Trump's views on the central
bank have swung wildly in the past year and a half. On the campaign
trail he slammed Yellen, accusing her of keeping rates artificially low
"because she's obviously political and doing what Obama wants her to
do." Now that Trump is in the White House, he says he "like[s] a
low-interest-rate policy" and "respects" Yellen.
the decision for Trump is that he wants the next Fed chair to do more
than craft monetary policy; he wants that person to lead the charge on
rolling back regulations on banks, including the Dodd-Frank Wall Street
Reform Act put in place after the crisis. Yellen has repeatedly stated
that she thinks banks are much safer today because of regulations,
although she has expressed openness to making tweaks to Dodd-Frank,
especially for smaller bankers.
Trump has an unusually large
opportunity to shape the Fed. In addition to picking the chair, he gets
to fill four openings out of seven Fed governor seats. If he does not
reappoint Yellen and she steps down, Trump would then get to make five
appointments, an unprecedented number in a short period. He has already
filled one seat with Randal K. Quarles.
Powell has emerged as a
strong candidate, meeting many of the qualities that would seem to align
with Trump's preferences. Powell would probably keep in place many of
Yellen's monetary policies, but he is a Republican and former partner of
the private equity firm the Carlyle Group who shares Trump's views on
pulling back regulations. Cohn, a former Goldman Sachs executive, is
also seen as someone who would provide continuity but with a lighter
touch on regulation.
The decision will rank among the most
important of Trump's presidency - the Fed chair wields tremendous power
over the domestic and global economy. The Fed operates independently of
the White House, but the president gets to nominate Fed governors,
including the chair, when there are openings. The Senate approves the
A Fed chair who aggressively hiked interest
rates would complicate Trump's goals of a stronger economy and thriving
market by the time he is up for reelection.
"This is a president
who loves low interest rates and happy markets, so this decision should
be easy: Yellen, a no-brainer," said Greg Valliere, a strategist with
Horizon Investments. "But he also hates regulations and must realize
that Dodd-Frank reforms are going nowhere in the Senate, which means the
Fed will have to lead the fight to kill regulations."
seen as the ideal choice for Trump for much of the summer, but he
angered Trump when he criticized the president's remarks after the white
nationalist rally in Charlottesville.
Taylor, who worked in the
George H.W. Bush administration, says quantitative easing - or QE, the
injection of money into the economy by the Fed - was a mistake. He says
the Fed should act almost like a computer, raising or lowering interest
rates when clear, transparent metrics are hit in the job market and
inflation. His framework for setting interest rates has been dubbed the
"Taylor Rule." If it were in place now, interest rates would probably be
higher than the current range of 1 to 1.25 percent.
argue that Taylor and Warsh would not disrupt the Fed's slow and steady
path of raising interest rates and unwinding QE. Once people get on the
Fed board, they have a tendency to soften their views and not operate
independently of the White House. All of the Fed's key decisions are
made by a committee of 12 people.
"You're the Fed chair, but you're not the dictator," said Michel, of the Heritage Foundation.