Musical Chair

A few thoughts on the top four candidates for Fed Chair.  I was going to do the top six, but the prediction markets are giving the top four 85% chance to win this thing.

  • Jerome Powell, member of the Board of Governors
    • Powell has academic chops (BA Princeton, JD Georgetown), financial experience (investment bank Dillon, Read & Co, and gigantic private equity shop The Carlyle Group), and policy expertise (Assistant Secretary and Undersecretary of the Treasury under Bush One).  As we know, Trump likes Finance Guys, and Trump’s favorite Finance Guy, Steve Mnuchin, likes Powell … and Powell is a candidate who probably checks the political boxes for Republicans while only slightly annoying academics.  Critics point to the fact that he lacks the typical Economics PhD credential of his predecessors. Critics from the other side point out that he never dissents on FOMC votes.
  • Janet Yellen, Chair of the Board of Governors
    • Ms. Yellen knows how to handle the position of Chair of the Board of Governors … because she already holds the position.  An impeccable record of academic and economic policy experience, I like Yellen.  She’s incredibly bright (BA Brown, MA and PhD Yale), and has plenty of experience navigating the world of economic policy making (Chair of Clinton’s Council of Economic Advisors, President of Federal Reserve Bank of San Francisco, Vice Chair of Federal Reserve System, and Chair of the Board of Governors).  The critiques are clear: she’s an ivory-tower academic who’s far too dovish.  My instinct is that a purely academic Chair with a mix of academics and financial professionals would probably make good decisions often enough.  From a practical standpoint, I think Trump should make a deal that Yellen can stay as chair in return for some help filling the rest of the vacant board seats, potentially offsetting the academic tone.
  • John Taylor, Big Deal at Stanford University and the Hoover Institution.
    • Mr. Taylor is a well-regarded Economist who is responsible for the “Taylor Rule” of responsiveness of nominal interest rates to inflation and GDP.  Not explicitly used by the FOMC to set interest rates, it’s a classic short hand for explaining Central Bank policies since its proposal in 1993.  So, he invented the monetary policy equation, has served on the Council of Economic Advisers under three presidents, and was Undersecretary of the Treasury under Bush Two.  With academic and political credentials, Taylor would be a fine choice, but may be too hawkish (more on this later).
  • Kevin Warsh, former member of the Board of Governors
    • A one-time favorite in this run-off, Mr. Warsh seems to have fallen back of the pack.  He has similar academic credentials to Mr. Powell (BA, JD), previous experience within the Federal Reserve system as a member of the Board nominated by Bush Two.  Warsh ultimately resigned from the Board in 2011 indicating that he believed easy monetary policy was covering up failed government policies.  To Warsh’s credit, Bernanke noted in his 2015 memoir that Warsh’s political and market savvy was “invaluable”.

From a Game Theory perspective, no President really wants a hawkish FOMC (no matter how many times he cries out for it during the campaign).  By definition, a hawkish FOMC is trying to slow down the economy … taking away the punch bowl before the party gets out of hand.  We pretend that people vote for the President based on intricacies of their platform positions, but how much do people actually care about the details of NAFTA or the Paris Treaty as long as their 401k goes up, their job feels safe, and their mortgage isn’t underwater?  A dovish FOMC keeps people fat and happy, which means the marginal voter doesn’t storm off to the polling station in 2020 as long as the bubble doesn’t burst before then.

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