Newspapers and experts have had their share of speculation and critiques of the choices that President Trump has in nominating the next Chairperson of the Federal Reserve, including the incumbent Janet Yellen. Paul Krugman dissed Kevin Warsh, a favourite of this blogger.
In doing so, he thought he was criticising President Trump’s choice of personnel. But, read differently, he seemed to be taking a big dig at the Federal Reserve itself.
Now, I don’t know who Trump will actually pick to head the Federal Reserve. It might actually end up being someone smart, knowledgeable and honest. Hey, there’s a first time for everything. [Link]
Is he saying that, for the first time, the Federal Reserve might have someone smart, knowledgeable and honest? That is some Freudian slip.
Now, Noah Smith at Bloomberg has waded into John Taylor, who has also been tipped as a potential Chairman of the Federal Reserve. He says that John Taylor would have raised interest rates in 2011 and that that would have been a mistake. I have a few questions for him.
While he is right to chart the Employment-Population Ratio, the level of stock market volatility and the core consumer price inflation, is it possible for him to prove that the monetary policy of the Federal Reserve was responsible for these? Or, will they have happened regardless of what the Federal Reserve did or did not do? Second, is it not possible to argue that the low stock market volatility might be a case of mixed blessing now and could be a source of disaster later? Third, before the 2008 crisis happened, America’s monetary policy managers were vigorously patting themselves on the back for steering the economy and financial markets away from risks. It was somewhat similar to the praise that Noah Smith confers on them now. They did not wait a full cycle to judge themselves. It is quite possible that he is making the same mistake now.
I think America would be better served by either of these two gentlemen. A substantial portion of the blame for the accumulated problems in the advanced world over the last three decades could be laid at the doors of the Federal Reserve. It is time for a regime change and that has to start with the change of personnel who have all tended to think alike.
John Cochrane endorses his colleague John Taylor at Stanford University. The reasons he advances for endorsing John Taylor are sound.
But, I am doubtful if President Trump would really drain the monetary policy swamp.