I found this piece from the Wall Street Journal by Brian Schwartz and Nick Timiraos about prospective Federal Reserve chairs interesting:
WASHINGTON—Two Republicans named Kevin are vying to be the next chairman of the Federal Reserve. One is rising to the top of the list of potential candidates, while the other is facing skepticism from President Trump’s allies.
Kevin Hassett, one of Trump’s closest economic advisers, is emerging as a serious contender to be the next Fed chair, according to people familiar with the matter. Hassett’s rise threatens the other Kevin—former Fed governor Kevin Warsh—an early favorite for the job who has angled for the position ever since Trump passed him over for it eight years ago. Some people close to the president worry that Warsh, who isn’t in Trump’s inner circle, won’t be a champion of lower rates.
What is unfolding is quintessential Trump: two ambitious men competing for his approval in a high-stakes contest that echoes the boardroom drama he once promoted on “The Apprentice.”
Hassett met with Trump about the Fed job at least twice in June, according to people familiar with the matter. The discussions marked a shift for Hassett, who previously had told allies he wasn’t interested, but now says he would take the job if offered.
Warsh has discussed traveling to Washington this month to meet with Treasury Secretary Scott Bessent about the Fed position, according to people familiar with the matter.
Hassett and Warsh didn’t respond to requests for comment. “President Trump has been clear about the need for the Federal Reserve’s monetary policy to complement the Administration’s pro-growth agenda,” White House spokesman Kush Desai said. “He will continue to nominate the most qualified individuals who can best serve the American people.”
I only have two observations.
First, we should have more bankers and fewer economists as governors of the Federal Reserve, particularly as members of the FOMC. The difference between bankers and economists resembles that between chemical engineers and chemists. Historically, Federal Reserve governors have tended to have been bankers.
Second, here’s a graph, courtesy of MacroMicro of the Fed funds rate (short-term interest rate) implied by the Taylor Rule vs the effective Fed funds rate:
I think that’s a powerful argument for automating the operation of the FOMC, at least more than at present. Note, too, that it suggests President Trump’s assessment of the present EFFR is wrong.
Walsh is not an economist or banker, he’s a lawyer by training; so is coincidentally Powell.
For close observers of the Fed, the three main candidates are Kevin Warsh, Kevin Hassett, and Christopher Waller.
I believe that graph is why Trump is having it with the Fed. Compare and contrast the gap (and the trend in the size of the gap) during Obama’s second term, Trump’s first term, Biden’s term (and in particular right before the 2024 election), and now Trump’s second term.
Yes, the graph does suggest rates could be modestly lower (0.5-1%); but it has to be weighed inflation is still not at the Fed’s target (2% average over the cycle, we still haven’t gotten to 2% since the cycle started in 2020).
Which raises another point about technocracy. What I have observed is that in practice technocracy does not mean “rule by experts” but “rule by lawyers”. I’m sure PD Shaw will have some observations about that.
Not really following you CO. Looking at the chart it suggests that the Fed should have lowered rates during the election. Trump’s claim, as I recall, is the FED kept rates low for Biden. (Inflation in 2017 was 2.13% 2018 was 2.5%. Note that it dropped to 1.8% in 2019 and the Fed did begin to drop rates then.)
Just a note- Lots of bankers have degrees in economics. You have probably heard of Jamie Dimon.
Steve
My interpretation of the chart is the size of the gap indicates policy being tight or loose, and the change in the size of the gap was whether it is getting tighter or looser.
Then the interpretation of the chart is Obama’s 2nd term, it was too loose and the Fed got looser by holding rates at/close to zero while neutral kept going up. Then during Trump’s, the Fed closed the gap to neutral; and likely would have been too tight if not for the Christmas 2018 pivot amidst Trump’s complaining. Biden’s term is a comedy of errors, basically far too loose from the moment Biden was sworn in. Then finally approaching the election, with inflation not back at the Fed’s target, while there was a noticeable uptick of where the neutral rate should be (i.e. the fed should be tightening), the Fed got looser; then after Trump gets back to office, the Fed stops and in effect tightens because indicated neutral rate is decreasing and creating a gap.
My usual quip is graduating from law school doesn’t make one a lawyer. He looks like he got a law degree and became an investment banker at Morgan Stanley. May never have passed the bar.