Oct 26th 2017

The Next Fed Chair

by Jeffrey Frankel

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.

CAMBRIDGE – US President Donald Trump’s administration is expected, by November 2, to announce its choice, subject to Senate approval, to succeed Janet Yellen as Chair of the Federal Reserve Board in February 2018. The White House has indicated that it is weighing five potential candidates. Not all of them would be a good choice.

The first candidate is Yellen herself. Though Yellen is a Democrat originally appointed by President Barack Obama, there is strong precedent for Trump to re-appoint her. Her three predecessors – Ben Bernanke, Alan Greenspan, and Paul Volcker – were each re-appointed to second terms by a president of the opposite party from the one who first appointed them, reflecting the value of continuity and predictability in central banking.

Yellen, whom I have known since we worked together in 1977, has performed very well in her nearly four years as Fed Chair. Though she hasn’t confronted a crisis, she did help to sustain the US economy’s steady recovery from the 2007-09 recession. Yellen, like Bernanke before her, used the Fed’s tools with a combination of clear communication and policy flexibility, shifting course as data revealed subtle changes in economic conditions.

The results speak for themselves. When Yellen was appointed to the Fed Board as Vice Chair in 2010, the US unemployment rate was at 9.9%. By the time she was promoted to Chair in 2014, it had fallen to 6.7%. Today, it stands at just 4.2% – and yet inflation remains low. Some complain that inflation remains below the 2% target; but the combination of low unemployment and low inflation used to be viewed as macroeconomic Nirvana.

The second potential candidate for Fed Chair is Jerome Powell, who has been on the Fed Board for five years. Powell might represent a good compromise for policymakers. On one hand, he has supported Yellen’s strategy, from her dovish interest-rate policies to her recent moves toward normalization. On the other, he is a longtime Republican with a financial background.

But Powell might face skepticism for his lack of academic training as an economist. PhD economists, like those who dominate the Fed’s staff and leadership, tend to favor their own kind and doubt others’ qualifications for top monetary-policy jobs. Certainly, a central banker without an economics PhD could struggle to hold his or her own against a large staff fluent in the models and jargon of academic economics.

Given this, many view a doctorate as a prerequisite for any Fed chair. But, in Powell’s case, I would argue that it should not be. Having known him since 1990, I can say that Powell has never been shy about asking questions. As a result, he has developed the analytical capabilities that a Fed governor needs. Almost as important, he won’t have a chip on his shoulder when dealing with more credentialed staff. From my perspective, Powell would stand out as one of the best appointments Trump has made.

The third potential candidate, Kevin Warsh, is a former Fed governor, who also has a background in finance – in this case, at Morgan Stanley – rather than in academic economics. But that is where the similarity between him and Powell ends.

Warsh, like many Republicans, has harshly criticized the Fed’s attempts to stimulate the US economy in the aftermath of the global financial crisis, warning that the unprecedented expansion of the monetary base brought about by quantitative easing would trigger high inflation. Warsh started making such hawkish – and clearly incorrect – warnings in 2010, when unemployment was 9.5% and runaway inflation was the last thing most economists were worried about. One can’t help but wonder if Warsh understands how the economy works.

The same cannot credibly be asked about the fourth candidate, John Taylor. Like Yellen, Taylor is an eminent economist with an impressive record both in academic research and as a practitioner of macroeconomic policy. In fact, he is the sixth most widely cited monetary economist, owing his renown especially to the Taylor rule, a guideline for setting interest rates in response to observed inflation and growth.

Nonetheless, like Warsh, Taylor has long believed that monetary conditions are excessively generous. That criticism was probably warranted during the housing boom that resulted in the 2007-09 financial crisis. And Taylor was in an ideal position to deliver that message, because he served as Under Secretary of the Treasury for International Affairs until 2005, which means that he met regularly with Greenspan, then the Fed’s chair, in private. One wonders why, if he is so opposed to easy monetary policy, he didn’t convey that to Fed governors at a time when the message might have done some good.

The White House’s final potential pick, Gary Cohn, is currently the director of Trump’s National Economic Council. But Cohn, who has no background whatsoever in monetary economics and whose views are unknown, may already be out of the running.

The complaint of most Republican leaders since Obama took office in 2009 is that monetary policy has been too loose. (Trump said the same when he was campaigning for the presidency, though, once in office, he suddenly proclaimed himself a “low rates guy.”) House Republicans wanted the Fed to adopt Taylor-style rules then; now, they want Trump to appoint Taylor himself.

But, historically, Republicans have pushed easy monetary policy when they have had the presidency. If, as is likely, financial markets and the economy run into headwinds in the medium term – perhaps in the run-up to the next presidential election – Trump will almost certainly blame his troubles on the Fed. The complaint, however, will not be that monetary policy is too easy, but that it is too tight.

Good central bankers wouldn’t heed such politicized criticism either way. They would make decisions based on what they believe is best for the economy, relying on evolving data, not on evolving political imperatives. The sitting governors have demonstrated the ability to do that.


Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.

Copyright: Project Syndicate, 2017.
www.project-syndicate.org




To subscribe to Facts and Arts' weekly newsletter, please click here.

To follow Facts & Arts' Editor, Olli Raade, on Twitter, please click here.

If you have something to say that you want to say on Facts & Arts, please

Write to the Editor, or write a comment in the comments section.

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Mar 31st 2023
EXTRACT: "Although the EU will have gained more internal stability, its basic character will have changed. Security will be a central concern for the foreseeable future. The EU will have to start thinking of itself as a geopolitical power and as a defense community working closely with NATO. Its identity will no longer be defined mainly by its economic community, its common market, or its customs union. The bloc has already accepted Ukraine as a candidate for future membership, and that decision was driven almost entirely by geopolitical considerations (as was also the case, previously, with Turkey and the West Balkan states)."
Mar 30th 2023
EXTRACT: "As I have long warned, central banks ..... will likely wimp out (by curtailing monetary-policy normalization) to avoid a self-reinforcing economic and financial meltdown, .... "
Mar 30th 2023
EXTRACT: "Netanyahu is simply unfit to be prime minister of Israel. He is a liar, a schemer and a fraud. If he has an ounce of integrity left in him, he should resign and save the country instead of stopping short of nothing, however evil, to save his skin."
Mar 29th 2023
EXTRACTS: "Though Mao Zedong viewed himself as Joseph Stalin’s peer, leading the world’s peasant communists as Stalin led its proletarians, behind closed doors Stalin reportedly called Mao a “caveman Marxist” and a “talentless partisan.” " ----- "Stalin’s behavior enraged Mao." ---- "When ..... Khrushchev, took over as Soviet premier following Stalin’s death in 1953, Mao paid back for Stalin’s disdain – and then some. On his return from his trip to Beijing in 1958, Khrushchev talked incessantly about how unpleasant his experience had been." ---- "Even if Xi did not have the upper hand before Russian President Vladimir Putin launched his war of choice in Ukraine, he certainly has it now..." --- "So, when Xi arrived in Moscow ..... he carried himself with an air of superiority, whereas Putin’s expressions appeared strained."
Mar 27th 2023
EXTRACT: "The spectacular collapse of Silicon Valley Bank (SVB) – the second-largest bank failure in US history – has evoked memories of the 2008 collapse of Lehman Brothers, which sparked the worst economic crisis since the Great Depression. But the current situation is, at least for Germans and other Europeans, more reminiscent of the “founder’s crash” (Gründerkrach) of 1873. Then, as now, an era of cheap credit had fueled a tech boom and then triggered a banking crisis. In those days, the startups were in railroads, electronics, and chemistry, but there were also a large number of financial startups rising with the tide. In both cases, the crisis was rooted in bad accounting rules that turned the financial system into a playground for gamblers."
Mar 16th 2023
EXTRACT: "Putin is desperate for a ceasefire, but he does not want to admit it. Chinese President Xi Jinping is in the same boat. But US President Joe Biden is unlikely to jump at this seeming opportunity to negotiate a ceasefire, because he has pledged that the US will not negotiate behind Zelensky’s back. -- The countries of the former Soviet empire, eager to assert their independence, can hardly wait for the Russian army to be crushed in Ukraine. At that point, Putin’s dream of a renewed Russian empire will disintegrate and cease to pose a threat to Europe. -- The defeat of Russian imperialism will have far-reaching consequences for the rest of the world. It will bring huge relief to open societies and create tremendous problems for closed ones."
Mar 15th 2023
EXTRACT: "Fifty years ago, a war broke out in the Middle East which resulted in a global oil embargo.... " ---- " Many historical accounts suggest the decade of global inflation and recession that characterises the 1970s stemmed from this “oil shock”. But this narrative is misleading – and half a century later, in the midst of strikingly similar global conditions, needs revisiting." ----- "In early 2023, the global financial picture feels disconcertingly similar to 50 years ago. Inflation and the cost of living have both risen steeply, and a war and related energy supply problems have been widely labelled as a key reason for this pain." ---- "In their public statements, central bank leaders have blamed this on a long (and movable) list of factors – most prominently, Vladimir Putin’s decision to send Russian troops to fight against Ukrainian armed forces. Anything, indeed, but central bank policy." ---- "Yet as Figure 1 shows, inflation had already been increasing in the US and Europe long before Putin gave the order to move his troops across the border – indeed, as far back as 2020."
Mar 7th 2023
EXTRACT: "The United States is in the midst of a book-banning frenzy. According to PEN America, 1,648 books were prohibited in public schools across the country between July 2021 and June 2022. That number is expected to increase this year as conservative politicians and organizations step up efforts to censor works dealing with sexual and racial identity."
Feb 28th 2023
EXTRACT: "As was the case before World War I, it is tempting to minimize the risk of a major conflict. After all, today’s globalized, interconnected world has too much at stake to risk a seismic unraveling. That argument is painfully familiar. It is the same one made in the early twentieth century, when the first wave of globalization was at its peak. It seemed compelling to many right up to June 28, 1914."
Feb 19th 2023
EXTRACT: "Another front has opened in the global rise of populist authoritarianism. With their efforts to weaken Israel’s independent judiciary, Prime Minister Binyamin Netanyahu and his corrupt coalition of Messianic fascists and ultra-Orthodox allies are determined to translate their anti-democratic rhetoric into authoritarian policy."
Feb 17th 2023
EXTRACT: "One year on from the start of a military operation that Moscow was expected to win easily, there are increasing signs of anger, frustration and resistance from ordinary Russian soldiers. These are important reminders that these men are not mindless pawns who will do Putin’s bidding under any circumstances."
Feb 16th 2023
EXTRACT: "Over the past few days, more details have emerged about the alleged Russian plot in Moldova. Apparently, well-trained and well-equipped foreign agents were meant to infiltrate the ongoing protests, then instigate and carry out violent attacks against state institutions, take hostages and replace the current government. This may seem far-fetched, but is it? Yesterday, Moldova denied entry to Serbian soccer fans who had planned to support their team, FK Partizan Belgrade, in a Europa Conference League match against the Transnistrian side Sheriff Tiraspol. ---- " ..... there is a history of Serbian football hooligans being involved in paramilitary activities, including war crimes committed by the notorious Arkan Tigers during the war in Bosnia in the early 1990s. Moreover, Russia attempted to overthrow the Montenegrin government in October 2016, just ahead of the country’s Nato accession the following year, in a plot eerily prescient of what was allegedly planned recently in Moldova.
Feb 14th 2023
EXTRACT: "As the British novelist L.P. Hartley once wrote, the past is “a foreign country: they do things differently there.” Alas, this does not mean that we necessarily do things better now. But to understand that lesson, we have to follow Santayana’s advice, and study history very carefully.."
Feb 7th 2023
EXTRACT: "Others who have left Russia include tens of thousands of the country’s excellent computer scientists, whom the armament industry desperately needs. In fact, so many Russians have emigrated to neighboring countries that Armenia expects its 2022 GDP growth to come in at a whopping 13%. Unlike oil fields, this is capital that Putin cannot nationalize or seize."
Feb 6th 2023
EXTRACTS: "Under these circumstances, Ukraine’s allies are right to scale up their military assistance, including by providing battle tanks. The goal is for Ukraine to prevail against its aggressor. But we cannot wish for that end without giving Ukraine the means to achieve it. The alternative is a prolonged war of attrition, leading to more deaths in Ukraine, greater insecurity for Europe, and continued suffering around the world (owing to Russia’s weaponization of energy and food supplies)." ---- "And make no mistake: the sanctions are working. Russian oil is selling at a $40 discount to Brent, and its daily energy revenues are expected to fall from around €800 million to €500 million after our latest measures kick in this month. The war is costing the Kremlin dearly, and these costs will only rise the longer it lasts."
Feb 6th 2023
EXTRACTS: "Brezhnev, in power from 1964 to 1982, signed the 1975 Helsinki Accords, together with the United States, Canada, and most of Europe. Eager for formal recognition of its borders at the time, the USSR under Brezhnev, together with its satellite states in Central and Eastern Europe, underestimated the potential impact of the Accords. That is probably why it agreed to include commitments to respect human rights, including freedom of information and movement, in the agreement’s Final Act." --- "Putin’s regime is turning its back on the legacy of Soviet dissent. Worse, it is replicating the despotic practices of Brezhnev and Soviet totalitarianism. If it continues on this path, it risks ending up in the same place."
Feb 5th 2023
EXTRACT: "....when countries like Saudi Arabia, Egypt, and, above all, China flagrantly violate their citizens’ human rights, liberal democracies must unite to constrain their behavior. Ultimately, it is up to those of us who believe in the universality of human rights to expose crimes against humanity and to uphold liberal-democratic values in the face of authoritarian threats" --- "....liberal democracies have a shared responsibility to support the Ukrainians fighting to defend their homeland and to protect their rights to self-determination and statehood in the face of Russian aggression."
Jan 14th 2023
EXTRACT: "On balance, then, the events in and around Soledar over the past week illustrate that no matter the outcome of the current fighting, this is not a turning point. It’s another strong indication that the war is likely going to be long and costly."
Jan 14th 2023
EXTRACTS: "Russian President Vladimir Putin has long regarded the collapse of the Soviet Union as a “geopolitical catastrophe.” The invasion of Ukraine, now approaching its one-year anniversary, could be seen as the culmination of his years-long quest to restore the Soviet empire. ..... "With Russia’s economy straining under Western sanctions, some of the country’s leading economists and mathematicians are advocating a return to the days of five-year plans and quantitative production targets." .... "The logical endpoint of a planned economy today is the same as it was then: mass expropriation. Stalin’s collectivization of Soviet agriculture in the late 1920s and early 1930s led to millions of deaths, and the post-communist 'shock therapy' of privatization resulted in the proliferation of 'raiders' and the creation of a new class of oligarchs. Now, enthralled by imperial nostalgia, Russia may be about to embark on a new violent wave of expropriation and redistribution."
Jan 11th 2023
EXTRACT: "These developments suggest that Indian economist Amartya Sen was correct when he famously argued in 1983 that famines are caused not only by a shortage of food but also by a lack of information and political accountability. For example, the Bengal famine of 1943, India’s worst, happened under imperial British rule. After India gained independence, the country’s free press and democratic government, while flawed, prevented similar catastrophes. Sen’s thesis has since been hailed as a ringing endorsement of democracy. While some critics have noted that elected governments can also cause considerable harm, including widespread hunger, Sen points out that no famine has 'ever taken place in a functioning democracy.' --- China’s system of one-party, and increasingly one-man, rule is couched in Communist or nationalist jargon, but is rooted in fascist theory. The German jurist Carl Schmitt, who justified Adolf Hitler’s right to wield total power, coined the term “decisionism” to describe a system in which the validity of policies and laws is not determined by their content but by an omnipotent leader’s will. In other words, Hitler’s will was the law."