Why We Need New Leadership at the Federal Reserve

1. President Trump Prepares to Name New Fed Chairperson
2. My View: It’s Time For a Change in Leadership at the Fed
3. President Considering Outsiders to Fill Fed Vacancies
4. See Who Pays the Most in Income Taxes in America
5. More Thoughts on Cutting Corporate Income Tax Rate

President Trump Prepares to Name New Fed Chairperson

President Trump is finalizing his decision on who will head-up the Federal Reserve when current Fed Chair Janet Yellen’s term is up in February. He also needs to appoint another person to fill the now vacant Fed Vice Chairman spot due to the resignation of Stanley Fischer earlier this month.

Mr. Trump interviewed Janet Yellen last Thursday and afterward the president reportedly said, “I like her a lot.” and suggested she is still a strong candidate for the job. Yet in an interview with Fox Business following the meeting, Mr. Trump mentioned by name two other leading candidates: Stanford University economist John Taylor and current Fed Governor Jerome Powell. The president is also said to be considering at least two other candidates.

Most of those who oppose President Trump on just about everything are urging him to reappoint Janet Yellen to another term. If not Yellen, then they say it should be Jerome Powell due to his experience at the Fed and the fact that his dovish views are very similar to Yellen’s.

The Yellen-Powell advocates are telling the president that the duo has avoided any big monetary mistakes, that they favor low interest rates and there’s no reason to take a risk on someone new. This despite the fact that Yellen seems intent on raising the Fed Funds rate several times over the next couple of years, as well as reducing its massive balance sheet.

My View: It’s Time For a Change in Leadership at the Fed

I would argue, however, that the Fed needs a change in leadership. Here’s why. Chair Yellen’s tenure as head of the Fed has come during an unusually quiet financial and monetary period – one in which economic growth was 2% or less and inflation was low. Put bluntly, it didn’t require a lot of leadership from the Fed.

Yet if President Trump succeeds at getting the tax reform he wants, additional deregulation and a large infrastructure program, the economy could heat up significantly. The economy already topped the 3% threshold in the 2Q at 3.1% in GDP. Most estimates I’ve seen for the 3Q are close to 3% despite the initial setback from the hurricanes. As rebuilding efforts get fully underway, this could stimulate the economy even more.

The Yellen-Powell Fed also appears to doubt that the economy can grow faster. Each quarter Fed Governors and regional bank presidents submit estimates for future growth. At the September 20 meeting, they raised their economic projection to only 2.4% for this year, despite GDP hitting 3.1% in the 2Q. And their median GDP estimate for 2018 is a mere 2.1%, followed by 2% in 2019 and 1.8% in 2020 and beyond.

Apparently, they are anticipating little growth impact from Mr. Trump’s deregulation or tax reform. This fits with the Fed’s dominant neo-Keynesian worldview that tax cuts aren’t pro-growth, and the US is stuck in a long era of “secular stagnation.” That is the view of most progressives these days. I disagree.

Yet Donald Trump campaigned on policies designed to get economic growth back to 4% or higher. The question is whether a Yellen-Powell Fed would accommodate much faster growth or feels it must rapidly increase interest rates to slow it down. Given its ongoing concern about inflation, there’s a very good chance Yellen-Powell would do just that.