On Monday, President Trump told reporters that he is “very, very close” to deciding who he will nominate as chairman of the Federal Reserve. Janet Yellen is the current chairwoman, and her term ends in February. Yellen, Jerome Powell, John B. Taylor, and Kevin Warsh appear to be the pool from which Trump will choose.
Powell, who is a current Fed governor, and Yellen have been cast as agents of the status quo. The Yellen-led Fed has been cautious, raising the federal-funds rate extremely gradually over the last two years from zero to the current 1.16. (The next hike, to 1.25, is set for December.) In September, Yellen also announced that the Fed will allow financial assets to roll off its balance sheet, but only gradually. Raising interest rates and shrinking the balance sheet are generally taken to constitute a tightening of monetary policy, but Yellen is proceeding cautiously enough to shirk the “hawk” label. Conventional wisdom is that Powell would follow in her path.
In contrast, Taylor and Warsh have been cast as tight-money hawks. Taylor is an esteemed academic economist who coined the “Taylor rule,” a model that adjusts interest rates counter-cyclically. Analysts have assumed that Taylor would be more hawkish than either Yellen or Powell, but there’s reason to doubt that, and his credentials are impressive.
Warsh, meanwhile, is a former Fed governor with a clear bias toward tighter money. As Ramesh Ponnuru noted at Bloomberg View, Warsh has been a hawk “when the economy was about to collapse, when it was showing early signs of recovery, and now, when it is well into a slow expansion.” The day after Lehman Brothers declared bankruptcy, Warsh infamously said: “I’m still not ready to relinquish my concerns on the inflation front.” The case against nominating a consistent hawk given the daunting risks of tightening right now is a convincing one.
Merits aside, whom will Trump pick? Nobody seems to know. The most recent report, from Damian Paletta and Robert Costa of the Washington Post, is that Trump has narrowed his choices to Powell and Taylor. But the Wall Street Journal reported that Mike Pence met with Warsh just last week to discuss the job, and yesterday, Trump asked Lou Dobbs for advice on television. Dobbs said that Yellen “might be worth keeping.”
Warsh is the wrong pick, and none of these candidates substantially address the concerns of heterodox monetary-policy thinkers. But it is heartening that all of the candidates pass a basic competency test.