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Msg  1992 of 4174  at  10/21/2017 7:52:32 PM  by

jerrykrause


A new Fed chair could upend more than just the central bank

 

A new Fed chair could upend more than just the central bank

Long, Heather. The Washington Post; Washington, D.C. [Washington, D.C


Replacing Yellen could mean big changes for central bank, economy

 President 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.

 Some 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 or Warsh.

 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 deliberations.

 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.

 The White House, which has confirmed the list of five finalists, says Trump aims to announce a nominee before he leaves for Asia on Nov. 3.

 The 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 recovery.

 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."

 Many 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.

 What complicates 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 president's nominees.

 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."

 Cohn was 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.

 But some 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.

  



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