I’ve done a few posts expressing opposition to Kevin Warsh being nominated to chair the Fed. Now there are rumors that John Taylor’s stock is rising:
Stanford University economist John Taylor, a candidate for Federal Reserve chairman, made a favorable impression on President Donald Trump after an hour-long interview at the White House last week, several people familiar with the matter said.
Former Fed board governor Kevin Warsh has meanwhile seen his star fade within the White House, three of the people said. They would not say why but Warsh’s academic credentials are not as strong as other candidates, and his tenure on the Fed board has been criticized by a diverse group of economists ranging from . . . [obscure nobodies] . . . to Nobel laureate Paul Krugman.
I had several problems with Warsh. He doesn’t have expertise on monetary economics, he didn’t do well during his stint at the Fed, and I worried that he might be more “political” than Bernanke and Yellen.
I have much less concern about Taylor. I believe that Taylor (and most other conservatives) missed the boat during the Great Recession, and was excessively worried that QE would lead to high inflation. But he is also extremely smart and well-qualified, and a person who is likely to keep the Fed out of politics. While the Taylor Rule is not the specific policy I favor, he’s a strong advocate for a rules-based approach.
Here’s why I think Taylor might be a good choice, despite my reservations about the Taylor Rule:
1. Fed chairs are generally not dictators, but work with a very well entrenched Fed establishment. Thus I would not expect Taylor to come right in and install the Taylor Rule.
2. Point one might seem like a weak argument in his favor, but I’m also thinking about the fact that the current Fed is not sufficiently rules-based. If Taylor and the Fed met halfway, it might well be a policy I could support wholeheartedly. In other words, I see Taylor as someone who might nudge the Fed toward a more rules-based approach.
3. The Fed has a 2% inflation target, and I’d expect Taylor to take that target quite seriously. Thus I’m not all that concerned about whether policy is “hawkish” or “dovish”, I want a more stable monetary regime. It’s not the end of the world if core inflation average 1.8% instead of 2% over the next 10 years (although I’d prefer they hit their targets), but it would be really bad if the core inflation rate became highly unstable, and also procyclical.
4. If (as I expect) Taylor were not able to immediately install his preferred policy rule, I believe he’d look to make progress in other areas. One obvious choice would be to adopt some of the accountability measures that I have advocated. These would make policy more disciplined and rules-based, without going all the way to a rigid mechanical formula. Policymakers would have to provide a clearer sense of what macroeconomic outcomes they are trying to achieve, and how they see their instrument setting enabling those outcomes.
5. Another possibility is Bernanke’s modified price level targeting proposal, which would make policy more accountable and rules-based at the zero bound. That sort of policy would have reassured conservatives who worried about the risk of high inflation back in 2010, while actually providing additional stimulus. Under level targeting there is basically no long term inflation risk. Also recall that Taylor said good things about NGDP targeting during the 1980s, so that’s another possible direction for reforms.
To summarize, rather than think about a new Fed chair in isolation, we should think about the outcome of the new chair interacting with the existing structure of the Fed. In the post title I said Taylor “might” be a good choice. In this sort of area one can never be certain, but my instincts tell me that he’d nudge the Fed a few degrees toward a rules-based policy approach, which is exactly what the Fed needs.
PS. Don’t take this post as an endorsement of Taylor as my first choice, rather I’m responding to the perception that I would oppose Taylor. Not true.