A Bloomberg story set out what they were hearing about the criteria for the vetting of potential Fed chair. (See Craig Torres et. al.: Trump’s Fed Picks Will Need to Show Willingness to Deregulate https://www.bloomberg.com/news/articles/2017-10-06/trump-s-fed-picks-are-said-to-require-willingness-to deregulate) Here, I outline the criteria mentioned in that story and add a few other considerations I think may be considered. I end with a table where I check off the criteria that I view each of the five leading candidates— Yellen, Powell, Warsh, Cohn, and Taylor—as meeting and give each an overall score. My scores are held with more confidence for some than others and, for some, I have more information than for others. Surely, many might end up with different scores. But I hope this will be a useful framework. I am trying to channel Mnuchin and President Trump here. I indicate if the criterion was mentioned in the Bloomberg article (B).
The Criteria for Vetting the Nomination for Board Chair
1. Expertise in monetary policy (B)
2. Willingness to roll back financial regulations (B)
3. Consensus building (B) and leadership skills within the FOMC
4. Ability to manage policy at the at the zero bound (B)
5. Familiarity with large and small banks (B) and the payments system(B)
6. Experience with public policy and politics (B)
7. Management of complex organization (B)
8. Support for Trump agenda
9. Good relationship with Trump
10. Safe choice
How Do They Do?
Before presenting my summary checklist, I provide my assessments of how Trump and Mnuchin may assess each candidate with respect to each criterion.
Expertise with monetary policy
Yellen has earned a gold star here. She has hands-on experience with monetary policy and is a highly respected academic who specialized in topics related to monetary policy. Taylor also gets a gold star because his research has guided central bankers around the world, especially work on policy rules, and is a highly respected academic. Taylor’s check plus also reflects that he gets an A+ from House Republicans for whom he is the favored expert on monetary policy, though they do not have a vote. Powell may get a passing grade from Trump as a result of his experience on the FOMC. But he will not be viewed as a true monetary policy expert like Yellen and Taylor, so in the end, I don’t give him a check here. Warsh may get a pass from Trump
here, as a former member of the FOMC, given that monetary policy is all he talks about, and perhaps especially because he was brought into the Bank of England to evaluate the transparency of the MPC’s monetary policy. However, he proved to be on the wrong side of the direction of monetary policy while on the FOMC. He won’t be viewed as an expert by current or former members of the FOMC and by the Democrats. And perhaps not by Mnuchin and Trump. So I don’t give him a star here. Cohn doesn’t get a check here.
Willingness to roll back regulations
I read the official position of the Fed to be that regulatory burden should be reduced for smaller banks and the Volcker rule has to be clarified for its implementation to be less damaging to the functioning of financial markets. Yellen supports a much more modest deregulation program and is outspoken in support of maintaining the core elements of financial regulatory reform. So she fails this test. Powell will likely be seen as more enthusiastic and credible in his support for reform than Yellen and might want to further, though he would not support the more radical agenda that Trump favors. But he has experience here and is seen to be a leader with respect to regulatory issues on the Board, reflected in the fact that he was chosen to be Chair of the Board’s Committee on Supervision and Regulation when Tarullo left. In addition, he would likely be more effective reaching agreements with other bank regulators, often necessary to be able to change regulations. Warsh gets a check because he is more likely, as a free-market Republican—to favor the more aggressive deregulation than Yellen or Powell for that matter. Taylor gets a Republican passing grade. Cohn, as a leader of the economic team in the Trump administration, gets a pass, though again I don’t know whether he supports the more radical deregulation that Trump favors. But likely a more aggressive deregulation program than Yellen or Powell.
Consensus builder and leader within the FOMC
Under Yellen, the FOMC has maintained the consensus-driven approach that began under Bernanke. Candidates who are out of sync with the FOMC policy direction, and harsh critics (Warsh and Taylor) of FOMC policies followed by the current Committee may have a more challenging time building a consensus. But the Chair does more than building a consensus. He or she may have the ability to shape the consensus, as has usually been the case. That’s more likely the case if the Chair is seen by Committee members as not one among equals, but someone with elevated status and ability to persuade, which is more difficult if he or she is out of sync with the Committee. The ability to persuade, in turn, derives from the background, experience, and respect for one’s judgment. While the Chair does not have to have a Ph.D. in economics and be a highly respected member of the academic community (Yellen and Taylor), that surely helps and seems to be a consideration in the White House.
Taylor may have helped himself in this respect and allayed fears among some policymakers by indicating more flexibility with respect to monetary policy at a recent conference in Boston. He has always seemed to have an almost-religious commitment not just to policy rules, but to his policy rule, and not to just inform policy but to make policy. The prescription from his rule however called for a much earlier lift-off and dramatically higher rate than where the Committee even thinks it is headed. But he said at the conference:
“The legislation wants the Fed to compare its strategy with some referenced rule. It could be rules, by the way, it doesn’t have to be one. And people have raised questions about independence, flexibility, how does the committee decides on a strategy, and other things. But it seems to me that this is a productive way to have a better engagement with the Congress and the public.”
He also said that “discretion” can be defined as deviations from a policy rule, and in his case, as with Congressional legislation, presumably his rule. He appears to want to begin with, as Don Kohn said, a presumption that the prescription from his rule is the right one, and then participants will be expected to explain why they think there should be a deviation from his rule. Similar again to what’s in the Congressional legislation. So there remains a lot of distance between Taylor and this Committee, but who knows until the rest of the nominees are made and confirmed. In any case, if nominated and confirmed, he is likely, at least at the outset, to follow Yellen and participants’ practice today, consulting a number of rules, informing their judgment, but not allowing a rule to dictate policy. Still, Taylor might encourage, as a compromise, that the Committee explains in public communications and to the Congress deviations from the set of rules they consult.
Manage new challenges near the zero bound and carry out policies to support a continued expansion
Being able to manage policy at the zero bound appears to be an important consideration. Experience with the unconventional tools used during the post-Great Recession period, having thought hard about lessons learned, with a willingness to think outside the box, and being party to staff research and internal discussion of other options in addition to asset purchases and forward guidance, give Yellen a gold star here, even though House Republicans are critical of the policies she followed. Powell has an edge here too because he was there and is experienced and well-schooled in policy at the zero bound.
I would give Warsh and Taylor very low marks here because they appear not to support the unconventional policies—QE and aggressive forward guidance—that appear to have been so important and likely to be used in the future. Taylor and Warsh would have preferred an earlier lift-off and faster pace of rate hikes to a higher endpoint. Many would expect that to have been a dangerous direction at the zero bound. I expect Mnuchin will appreciate that. On the other hand, Warsh and Taylor have the advantage of being in sync with the widespread view among Republicans that questions policy during this period, including the use of unconventional policies and a very large balance sheet. This may come down to whether Trump wants an agent of continuity or an agent of change with respect to the low rate policy he prefers! No check for Taylor and Warsh here.
In terms of more generally supporting policies that would contribute to continuing this expansion. Yellen again earns a gold star. She favors continued monetary accommodation to push the unemployment rate lower, even though the unemployment rate is widely viewed as already below the NAIRU. Yellen is, by far, the best candidate for Trump in this respect to the monetary policy she favors and he wants. Powell gets a passing grade, as a centrist aligned with Yellen. Warsh and Taylor, not so much! They would be at the hawkish end of the Committee and they might pursue policies that threaten the expansion. On the other hand, they favor the Republican orthodoxy with respect to monetary policy as opposed to activist stabilization policy, meaning they put less weight on the employment part of the dual mandate and are more focused on not overshooting the inflation objective, whereas I expect Trump is much less concerned with a modest overshooting the inflation objective if it buys him faster employment growth and a lower unemployment rate. Cohn is an unknown.
Knowledge of large and small banks and the payment system
Of course, this is true for Powell, given his role in overseeing the Fed’s role in supervision and regulation and chairing the System-wide Committee on Payments, Clearing, and Settlement. Warsh comes from Wall Street, but with little experience here. Cohn must have some knowledge here. Taylor has less experience here. No check.
Public policy experience
All get checks here. But Yellen gets the gold star here. In addition to being on the Board and serving as Chair and Vice-Chair, she was a Reserve Bank president and was also Chair of Clinton’s CEA. Powell was in the George H.W. Bush Treasury. And he was associated with the Bipartisan Policy Center before going to the Board. Warsh was on the NEC in the George W. Bush administration and a Fed Governor. Taylor was Under Secretary for International Affairs in the G. W. Bush Treasury. Cohn is currently the head of the National Economic Council.
Ability to manage a large complex organization
This may be seen as correlated with private sector experience (Warsh and Cohn), but Yellen has managed a large, complex organization, the Fed no less. While Warsh, on the other hand, has private sector experience, but he doesn’t have management experience. Powell gets a gold star because of his management experience at Carlyle. Cohn, of course, also gets a gold star here. No check for Taylor.
Support policies that are in sync with Trump’s agenda
When chairs testify, they are often asked as much about fiscal and other government policies as monetary policy. They can support the Trump agenda or push back. Trump might be very sensitive to this. In that case, this could disqualify Yellen. Powell, as a Republican, gets a pass, though his support for Trump’s agenda is not likely deep at all. Cohn will likely be seen as a supporter of the Trump agenda, even though, as a Democrat, that is questionable. Warsh and Taylor, as Republicans, get gold stars here.
Has a good relationship with Trump
I added this one, for obvious reasons. Cohn appeared to be failing this very critical test. Trump likely feels he will get along fine with the others, even Yellen.
I added this one. Confidence that a candidate could get through confirmation without drama and controversy is always a consideration. Trump doesn’t need any more controversies. Powell is likely to sail through the confirmation process, and he has done so before. Yellen, Warsh, and Taylor have also made it through this process before. But Yellen will cause an uproar with Trump’s base, and Warsh and Cohn will be more controversial than Powell or Taylor.
I am keeping my list to ten, so I have consolidated a couple of the criteria in the Bloomberg article and added a few other considerations that might be relevant. First, looking and talking like a chairman might be very important to Trump. Say no more. The second is support inside the administration. Mnuchin is said to favor Powell. That gives Powell a leg up. Warsh is said to have lost favor within the administration. Third, how much do Trump and Mnuchin believe each is subject to political influence? Mnuchin is said to favor Powell in part because he sees him as subject to political influence. Certainly wrong, but that helps Powell. May feel the same way about Warsh, seen as very political. Yellen, not a chance. May expect some cooperation from Taylor as well, given his ties to the Republican party. but unlikely in his case.
Here is my matrix and checks, as well as my summary score, % of criteria that each candidate passes. A check with a star means a higher level of confidence in that rating than if no star, and/or it seems likely to be especially important to Trump.
|Monetary policy expertise||✗||✓*||✓*||✗||✗|
|Roll back financial regulations||✓||✗*||✓*||✓*||✓*|
|Manage challenges at zero bound||✓||✓*||✗||✗||✗|
|Knowledge of banks and the payment system||✓*||✓||✗||✓||✗|
|Public policy experience||✓*||✓*||✓||✓||✓|
|Manage complex org||✓*||✓||✗||✓*||✗|
First by the numbers, following the rules of the game. Powell first, Yellen second, Taylor third, Cohn fourth, and Warsh (and I am surprised too) fifth.
But I offer a second ranking, following discretion (mine) informed by rules rather rigidly applying the rules! This ranking takes more account of the stars and the fact that some bad marks might be disqualifiers. Also, I take account of whether a nominee is a Democrat or a Republican, something correlated with the more general political and policy views of the candidates, In any case, Powell is #1, a Republican, a former FOMC member, private sector management experience, gets a passing grade on his views on deregulation, and is apparently favored by Mnuchin. That’s why see him as the most likely nominee. Yellen, by the numbers, is second; but I move her to third as her views on deregulation and being out of sync with Trump’s broader policy agenda (no doubt reflecting the fact that she is a very liberal Democrat) might be disqualifiers, not to mention the disappointment within Republican circles and perhaps outrage among his base. I keep her at third because she is an expert in monetary policy; because the current chair is usually re-appointed by a new president, even when he is from a different party, and of course, has the best experience, and would be the most “low rate” candidate. Taylor moves up to second, as an expert in monetary policy with a Ph.D. that now seems to carries some weight, and a check on deregulation and more in sync with Trump’s broader agenda, and, of course, a Republican and active in supporting presidential candidates and serving in their administrations. He’s paid his dues. He wants the reward. But he might be dangerous to Trump’s re-election prospects! Still, the White House might see a Taylor for chair and Powell for vice-chair as a dream team, and the two safest choices. Cohn is fifth. Can’t overcome the falling out with Trump, is a Democrat, and, more importantly, is not even a good fit for the job. That leaves Warsh at fourth, a mixed bag, and apparently, his candidacy is fading in the White House.