Janet Yellen’s term is ending at the Federal Reserve. With new appointments, President Trump can indirectly shape US monetary policy for years to come – for better or worse.
Serving as the “epitome of calm”, Fed chief Ben Bernanke responded to the global financial crisis by cutting the federal funds rate to zero and initiating rounds of quantitative easing (QE) soon thereafter.
When Janet Yellen replaced Bernanke in 2014, US economy had begun the exit from zero-interest-policy-rates (ZIRP) but not balance sheet normalisation.
As Yellen’s term will end on February 2018, President Trump will soon select the next Fed chief and several new members of the Fed Board. Consequently, Trump will indirectly shape US monetary policies for years to come.
Not surprisingly, Trump has been assisted by Vice President Mike Pence, who has met with outside advisers – including Heritage Foundation economist Steve Moore, conservative economist Larry Kudlow and former President Ronald Reagan economic adviser Art Laffer – to assess the criteria for the next Fed leader.
Trump’s current shortlist features half a dozen viable candidates. In line with his “America First” approach, Trump is likely to ignore the international implications of the next Fed chief. Nor has he any interest in the Phillips curve that has influenced Yellen’s monetary stance.
Instead, Trump is likely to choose a candidate that will not prove too independent and who will prioritise Main Street, not Wall Street – and one that will support his proposed fiscal expansion.
The Fed has a dual mandate to maintain stable prices and full employment. Monetary “hawks” tend to stress prices at the expense of jobs, whereas “doves” tend to focus on jobs at the expense of prices.
Both Yellen and Bernanke are academic experts of the Great Depression. As a Keynesian economist and monetary dove, Yellen has been cautious with the pace of normalisation. The Fed shortlist features several Wall Street insiders who have been seen as frontrunners. Such assessments underestimate Trump’s suspicions about Wall Street.
Kevin Warsh is a “hard money hawk” with close ties to Wall Street. Married with the $2 billion heiress Jane Lauder, his father-in-law is Ronald Lauder, a longtime friend of Trump. After serving as Morgan Stanley’s M&A executive, Warsh was President Bush’s director of the National Economic Council. At just 35 years old, he became the youngest appointment in the Fed.
Like Greenspan, Warsh is an ultimate free-market advocate. In 2007, less than a year before the rescue of Bear Stearns, he argued that financial innovation made the system safer. During and after the 2008 crisis, Warsh served as a governor of the Fed and its primary liaison to Wall Street. As US economy fell into deflation, he kept predicting that inflation would rise.
More recently, Trump met Stanford’s John B. Taylor, an accomplished academic of monetary economics. Taylor believes that the global crisis was caused by flawed macroeconomic policies in the US and elsewhere. Under Alan Greenspan, the Fed created “monetary excesses”. Interest rates were kept too low for too long, which led to the housing boom.
Unlike Bernanke and Yellen, Taylor has long cautioned the Fed should move away from quantitative easing measures and opt for a more stable monetary policy. If Warsh is a monetary hawk, Taylor is a monetary conservative.
Gary Cohn is Trump’s Director of the National Economic Council and his chief economic advisor. Unlike Warsh and Powell, Cohn is a registered Democrat. As former president and COO of Goldman Sachs, he is considered aggressive and arrogant. But unlike his rivals, he supports reinstating the Glass-Steagall legislation, which would separate commercial and investment banking.
About the Author
Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/