Donald Trump would be wise to reappoint Federal Reserve Chair Janet Yellen. Trump has said he will decide by early November.
Keeping Yellen would plainly serve Trump’s political interests. Yellen’s stewardship of the Fed has kept the recovery on track, stimulated inflation-free economic growth, and even permitted a little wage growth despite the wreckage of unions and the loss of labor power in the gig economy. The result is also record stock market levels.
Yellen is one of Barack Obama’s best appointees, and perhaps the best Fed chair ever. Thanks to Yellen, Trump enjoys bragging rights for an economic boom not of his own making. So what’s not to like?
For one thing, there’s the inescapable, galling fact that Trump’s nemesis, Obama, appointed her. For another, Yellen is a liberal Democrat. And third, Yellen found the economic sweet spot by combining strong financial regulation with low interest rates. Tough regulation is not exactly Trump’s thing.
At the time of the 2008 financial collapse, the conventional wisdom was that that the crash resulted from former Fed Chair Alan Greenspan’s policy of very low interest rates. Yellen correctly understood that the problem was not the low interest rates, which the economy needs; it was the combination of low rates with the gutting of banking regulation, which caused the cheap money to finance speculation with fraudulent financial products, ending in the collapse of a house of cards.
Yellen has fended off premature pressure to raise rates in the face of a still-fragile recovery. As Fed chair, she continued the policy reluctantly begun by her Republican predecessor, Ben Bernanke, of having the Fed buy up large quantities of Treasury bonds as well as depressed bonds backed by underwater mortgages.
This was a way of stimulating the economy as well as helping restore solvency to bank balance sheets. The policy was given the sanitized and obscure euphemism “quantitative easing,” a term that had no meaning. Basically, it was credit creation—printing money.
This sort of policy gives conservatives hives—even more so when the policy works. But when the real economy is weak, that’s exactly the time to create credit. The fact that inflation is nowhere on the horizon is proof of the continuing weakness of the economy—and the success of the Fed policy.
As the economy has belatedly strengthened, Yellen has begun the delicate task of slowly selling off the securities in the Fed’s swollen portfolio at a rate that markets can absorb, without knocking the recovery off course.
It is something of a miracle that Yellen ever got the job. For starters, she is a progressive and a critic of the irrational inflation-phobia that characterizes so much of her profession and nearly all central bankers. She is also a complete rarity among Fed chairs, a close student of labor markets—with an appreciation of the importance of full employment.
Under the Humphrey-Hawkins Act of 1978, the Fed has what’s called a “dual mandate”—to pursue both low inflation and full employment. Few Fed chairs give equal priority to the latter. Yellen does.
Yellen has another rarity—she did not come from the financial industry. She was a distinguished academic economist who did a stint on both the Council of Economic Advisers and as a Fed governor under President Bill Clinton, and then served as head of the regional Federal Reserve Bank of San Francisco before returning to academia.
Normally, orthodox opinion among the economics profession and on Wall Street would filter out people like Yellen from even being considered to chair the Fed. Yet she came with such brilliance and credentials that Obama was dissuaded from appointing his first choice, the far more orthodox Larry Summers, in favor of Yellen.
The one other truly great Fed chair, Marriner Eccles, was Franklin Roosevelt’s appointee. Like Yellen, Eccles broke the usual rules, insisting on very low interest rates to finance the immense World War II debt. It’s curious how progressive Democrats managed the nation’s monetary policy far better than the usual Republican Wall Street gang.
So what will Trump do? The White House has signaled that he will appoint a Fed chair by early November. The smart move would be to rename Yellen.
Trump himself said in a Sunday interview broadcast on Fox that there were three names on his short list—Yellen and two Republicans. One is Stanford economist John Taylor; the other is a current Fed governor, Jerome Powell, known as Jay. Two other names that have been mentioned by White House sources are Gary Cohn, who heads the National Economic Council, and former Fed governor Kevin Warsh.
Two of the above, Taylor and Warsh, are inflation hawks. Taylor, who served at the Treasury under President George W. Bush, is famous for making predictions that don’t materialize. He’s author of something called the Taylor Rule, a needlessly rigid formula for when to raise interest rates. He also viewed the 2008 financial collapse as being the result of flawed macroeconomic polices, and not of reckless deregulation.
Warsh, if anything, is even more of an inflation hawk. He was appointed to the Fed by George W. Bush in 2006 at age 35, with a background as a mergers and acquisitions guy. He had no experience in monetary policy and was a total unknown among economists. He spent his five years on the Fed challenging then-Chair Ben Bernanke for being too liberal on interest rates and not sufficiently mindful of inflation.
So if Trump desires to shoot himself and the economy in the foot, either Taylor or Warsh would do the job nicely. Presumably, even with Trump’s short attention span and erratic impulses, Cohn and Treasury Secretary Steve Mnuchin will point that out.
Investors are enjoying the steep run-up in stock prices, and waiting for a signal that a “correction” is about to begin, in which case large numbers of stockholders will cash in their winnings, causing the sharp fall in stock prices that they fear. The day that Trump appoints Taylor or Warsh, look for an abrupt stock market lurch, followed by slower growth triggered by higher interest rates.
The other two possible candidates, Cohn or Powell, would continue Yellen’s policy of very gradually letting rates rise a bit, though without wrecking the recovery. There would be one major difference, however.
Powell and Cohn are no friends of tough regulation. So the risk would be the same combination that created the Greenspan bubble followed by the 2008 collapse—loose money and looser regulation. Indeed, Monday’s Wall Street Journal has a front-page piece crowing about the return and growth of securitized loan products, of the sort that built the financial house of cards in the early 2000s and collapsed the economy in 2008.
At the Fed, with the loss of pro-regulation governors Danil Tarullo and Sarah Raskin, there has already been too much backsliding. Trump’s executive actions on other regulatory fronts have been an invitation to even more speculation.
The wise guys say that Cohn is out of the running—Trump needs him at the White House. Supposedly, the favorite is Powell.
Who is Jay Powell? He’s a Wall Street guy (of course). He started out at the investment banking firm Dillon Read, and later became a partner in the Carlyle Group, one of the largest Wall Street private equity companies. In between, he served in senior Treasury positions for President George H.W. Bush.
Powell personifies the swamp that Trump pledged to clean out. Basically, he’s Yellen on monetary policy and Greenspan on non-regulation—risking another bubble and collapse. In the Trump era, he’s as good as it gets.
It sure looks to me as if Yellen was included on the short list as a feint. This is standard Trump practice. Given his animus towards anything or anyone associated with Obama, it would be astonishing if he reappointed her.
So the fake populist Trump is likely to give us a Wall Street guy to chair the Fed. If he’s smart, it will be one who won’t choke off the recovery. If he’s a total, self-defeating dope, he’ll give us an inflation hawk.
An earlier version of this column ran at the Huffington Post.