Notice & Comment

The Federal Reserve Circus: What Did We Win, What Did We Lose

Today, the President is likely to announce Jerome Powell as his pick for Fed Chair. It’s a move that had been telegraphed for the last few days and followed an unusually extended vetting period. The comparisons between President Trump’s personnel processes and Donald Trump’s reality television showmanship are easy to make and just as easy to criticize. Now at the end of it, my questions: what did we win and what did we lose from the Trumpian procedure and Trumpian outcomes?

What we win is accountability. Some view this kind of political theater as new and dangerous. I see it as old and healthy. The public usually doesn’t care much about the Fed, despite its extraordinary power over their lives. In that sense, it’s the inverse of the U.S. Supreme Court: the ratio of its power over people’s lives and the attention people pay to it approaches the infinite (whereas, in this business professor’s view, the Supreme Court’s power-attention ratio approaches zero, with all respect to my law professor co-bloggers).

There are two exceptions to this general rule: when the Fed intervenes in ways that cause immediate, attributable tumult and when we are picking a new Fed Chair. Instances of the first category include when the Fed permitted a dramatic increase in interest rates in 1979 – 1984 or the Fed’s extremely unpopular (but probably system-saving) interventions after 2008. The Fed doesn’t like this kind of attention, for good reason. The public glare adds heat but little light, giving the work of monetary and regulatory policy a partisan sheen that it would otherwise not have.

The second category is different. The Fed Chair “race” gives the public an opportunity to intervene not just to lambaste the Fed for decisions that may or may not be difficult to track in public discourse, but to debate what the Fed is and what the Fed should be. The quality and quantity of thought pieces taking deep dives into economics, politics, personalities, history, and more have been staggering during the “circus.” Some of it trivial, but most of it very substantive. This is what accountability looks like at its best.

There’s nothing new about the importance we attach to the Fed Chair selection process, but I will grant that President Trump’s approach has been unusual in one respect: until a few days ago, he had as his finalists candidates who share almost nothing in common ideologically, temperamentally, in training, in monetary policy outlook. In previous races, the Administration settled more or less quickly on a “type” of central banker they wanted, and then it came down to personalities, constituencies, politics. President Trump did not. Stanford economist John Taylor has a radically different view, for example, of the Fed’s relationship to Congress than Janet Yellen and Jerome Powell. Kevin Warsh and Gary Cohn have radically different professional backgrounds from Janet Yellen and John Taylor (and from each other, for that matter).

This kind of variety, though, only enhances public participation. President Trump’s approach effectively outsourced the threshold question: what should a central banker be? And the people responded these last months with extraordinary substance. What we win, then, is a process robust in its accountability and transparency.

Compare the Fed appointment process to the way the Administration selected Neil Gorsuch for the U.S. Supreme Court. The President received a list from rock-ribbed conservatives initially chary of supporting this thrice-married, casino-owning former Democrat. The list, from a single constituency within his electoral coalition, contained names of mostly fungible conservative appellate judges whose worldviews varied little on key questions of history, law, politics, and the Fourteenth Amendment. Very little about that process allowed us, as citizens, to have hard questions about what the Supreme Court is and what it should be. Any effort to do so was just shadow boxing.

President Trump’s reality television approach to the Fed flipped that script and, I submit, made the public smarter about what is at stake in Fed governance. So three cheers for the circus. I hope we are treated to the Fed version of personnel selection when there is next a vacancy on the Supreme Court.

That’s what we win. Here’s what we lose.

In part, we lost Janet Yellen. This is unfortunate. The Yellen Fed has had the best headline numbers—the lowest inflation, the lowest unemployment—of any Federal Reserve regime in the modern era. There are important criticisms of the Yellen Fed’s failure to meet its inflation targets—I think Scott Sumner, David Beckworth, and my co-author Miles Kimball are the most interesting of these critics, but there are many others. Most of the critical discussion of the Yellen Fed, though, has more to do with Republican antipathy for anything connected to Barack Obama. It has nothing to do with whether the Fed has met its congressional mandate. She has been politicized in ways that I think are unfortunate for Fed accountability and Fed independence alike.

Here’s the truth about Janet Yellen. She was the most experienced central banker in Fed history, having served four independent rotations on the Federal Open Market Committee. She handled the various roles that the Fed Chair requires with significant skill. No one has delivered on the Fed’s dual mandate better. She will rank highly among history’s central bankers, and I’m sad to see her go.

But that’s not the main loss in this outcome. Janet Yellen is also the only Federal Reserve Chair to not gain reappointment at the conclusion of a four-year term. (Genuine Fed history buffs can argue Thomas McCabe with me, given his “resignation” as part of the Fed-Treasury Accord, but I’ll put him to the side.) Since 1955, when Republican Dwight Eisenhower reappointed Truman Fed Chair Williams McChesney Martin, there has been a strong norm of cross-partisan reappointment. The idea of Democrats reappointing Republicans (Bernanke, Greenspan) and Republicans reappointing Democrats (Martin, Volcker) sends an essential message about politics and the Federal Reserve: we must have accountability, but we strive mightily to leave partisanship outside the process. We don’t always succeed, and can’t always succeed. There isn’t a shouldn’t be a seal protecting the Fed from any political interference. But in the cross-partisan reappointment norm, we had a fail-safe for turning the Fed into another partisan punching bag.

President Trump’s decision to appoint Republican Powell instead of Democrat Yellen discards that political tradition and removes that protection. It was easy to do. Indeed, I think maintaining it would’ve been much harder. Powell will likely sail through appointment. As a Democratic Senator, I would probably be one of the “yes” votes.

That’s the thing about changing political norms. There is now a new tradition. In four years, if Democrats control the appointment machinery, will they restore the old order and reappoint Chair Powell? I don’t know, but I doubt it. Tis a loss for all of us.


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