LOOK only at unemployment and inflation, says Peter Conti-Brown, a historian of the Federal Reserve, and Janet Yellen is the Fed’s most successful boss of all time. The second indicator may be below target, but that is a blip compared with the recessions most Fed chairmen have endured. So it is perhaps not surprising that President Donald Trump is openly considering retaining Ms Yellen, a Democrat installed by Barack Obama, after her term ends in February 2018. Nor by historical standards is it odd: the Fed’s past three leaders were all reappointed by presidents from the other party. Yet Ms Yellen, whom Mr Trump criticised on the campaign trail, is not the leading candidate. PredictIt, a betting site, gives her a 28% chance of staying put. In front of her, with a 36% chance of appointment, is someone else Mr Trump is publicly weighing up: Gary Cohn (on the left above).
Mr Cohn was until January the chief operating officer and president of Goldman Sachs. He left that role to become the president’s senior economic adviser. A domineering personality, he has amassed influence in the administration, outshining Peter Navarro, Mr Trump’s trade economist. Mr Cohn is often said to lead a “globalist” faction within the White House, against protectionists like Mr Navarro and Steve Bannon, another adviser.
He would, however, make an unusual Fed chairman. He has no background in economics, even as a student. The previous chief to have been similarly unqualified was William Miller, who spent an unhappy year and a half in 1978 and 1979 presiding over low growth and soaring inflation. A happier comparison is to Marriner Eccles, chairman from 1934 to 1948. Like Mr Cohn—and unlike Miller—Eccles had been a successful financier. Also like Mr Cohn, he was close to the president who appointed him, Franklin Roosevelt. And his lack of economics training did not stop him from backing Keynesian stimulus after the Depression, even before Keynes himself had published “The General Theory”. Eccles made such a mark that the Fed’s headquarters are named after him.
Mr Cohn might find the Eccles building staid. It lacks the day-to-day energy of the White House or Treasury, let alone the buzz of the trading floor. Inside, staff quietly digest vast quantities of economic research to prepare for less-than-monthly monetary-policy decisions. Some wonder if Mr Cohn has an appetite for the minute analysis which, unlike the practice in most organisations, is carried out even by the Fed’s leaders. The chairman can, of course, lean on his staff. But one of Miller’s problems, says Mr Conti-Brown, was that he lost the respect of his better-trained colleagues.
The Fed’s chairman has to be confirmed by the Senate, and some doubt whether it would accept Mr Cohn. Despite the Republicans’ control of the chamber, Ms Yellen, given her record, may be a surer bet. Yet the praise for her record can be overdone. She has not been tested by many economic shocks. And the inflation shortfall—underlying inflation, currently 1.5%, has not hit the Fed’s 2% target during her tenure—was not entirely unforeseen. Larry Summers, the former treasury secretary whom she beat to the job, has been relentlessly advocating looser monetary policy to stoke more inflation. Ironically, Ms Yellen’s main charm for Mr Trump seems to be that she is “a low-interest-rate person”. In truth, she relies on the unemployment rate to guide her. While it was too high, she was doveish. Now it is just 4.3%, she seems comparatively hawkish.
The Cohn unknowns
The interest-rate opinions of the favourite to succeed her are less clear. Mr Cohn thinks that monetary policy is a global endeavour, and that central banks may have been playing beggar-thy-neighbour. In March 2016 he told a conference that if every central bank suddenly raised interest rates by three percentage points, “the world would be a better place”. Yet he also said he was not sure Ms Yellen had been right to raise rates three months earlier. And he criticised the Fed’s recent forward guidance as confusing for the markets. He said it should worry more about what it does than what it says.
The Fed is not only responsible for monetary policy. It is also the biggest regulator of banks. Here Mr Cohn is more in sync with Mr Trump’s deregulatory agenda. However, that may not matter much. The president recently nominated Randal Quarles, another critic of recent regulation, to be vice-chairman for supervision, a post left empty since it was created in 2010 (though in practice the job was done by Daniel Tarullo, who left the Fed in April). Whoever heads the Fed, Mr Quarles will probably take the lead on regulation.
Other candidates are in the frame. Kevin Warsh (pictured on the right), a former banker who was a Fed policymaker from 2006 to 2011, appears to be manoeuvring for the job. Republicans in Congress may favour John Taylor (in glasses), a Stanford academic who devised a mathematical rule that describes central banks’ actions and, like many Republicans, wants the Fed to follow such an algorithm.
The two outsiders have contrasting skills. Mr Warsh is a smooth-talking politician who may lack the intellectual firepower of past Fed chairs. Nobody can doubt Mr Taylor’s braininess. But he did not leave much of a mark on Washington during previous stints there, most recently at the Treasury during George W. Bush’s first presidential term. So he may lack the political nous the job demands. In any case, Mr Warsh and Mr Taylor may well both be too hawkish for Mr Trump. After the financial crisis, both opposed the Fed’s quantitative easing (QE)—ie, purchases of securities using newly created money—warning of a surge in inflation. In fact, inflation has mostly been too low since then.
No names spring to mind, but Mr Trump still has time to find a trained economist who is a Republican and yet tends towards Ms Yellen’s views on interest rates. Even such a conservative dove might shake up the Fed. Republicans have long complained about its $1.8trn portfolio of mortgage-backed securities, a result of QE. The central bank hopes to start unwinding QE soon, but its current plans would leave some mortgage-backed securities on its balance-sheet for more than a decade. A Republican chairman might make his mark by offloading these securities faster. But given the stability of Ms Yellen’s tenure, markets could be forgiven for wanting as few changes as possible.
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