Trump's Fed Can Start a Central Bank Revolution
President Donald Trump will select three members of the Federal Reserve board during his term in office, including a replacement chair for Janet Yellen when her appointment expires early next year. He should seize the chance to refresh the Fed with faces from the business community, adding executives to the roster of PhD economists who currently run monetary policy in most of the world.
The Fed appointments come at a key juncture in U.S. economic policy, one that makes business knowhow an even more valuable commodity for a rate-setter than usual. Trump's fiscal policies will set a new backdrop for the monetary policy environment, given his intention to cut personal and business tax rates and boost investment in the nation's infrastructure.
So appointing executives to the Fed who've had to take fiscal and monetary policy into account when making decisions on where and when to build new factories or make other capital expenditure decisions makes sense.
Torsten Slok, the chief international economist for Deutsche Bank AG, sent around a chart last week showing how the composition of the Fed has become increasingly focused on PhD economists:
It's little wonder that in this populist age central bank independence is under attack. As Bloomberg News reported on Monday, the rise of populism is putting pressure on central banks as "institutions stuffed with unelected technocrats wielding the power to affect the economic fate of millions." Leavening the boards of policy makers with executives who've made hiring and firing decisions and have helped build companies would be a way to address the perception that decisions about borrowing costs are made in ivory towers by economists who've all read the same textbooks but don't inhabit the same world as the people they're supposed to serve.
There are precedents for giving business folk the monetary reins. Edward Kelley ran his father's manufacturing company for 20 years, and served as a Fed board member for 14 years until 2001. David Lilly was president and chairman of Toro Co., maker of lawn mowers and landscaping equipment, before landing at the Fed from 1976 to 1978. Wayne Angell was a farmer in the early 1970s before joining the Fed in 1986. Since July 2015, Japan's central bank board has included Yukitoshi Funo, who ran Toyota Motor Corp.'s North American business; he in turn replaced Yoshihisa Morimoto, a former Tokyo Electric Power Co. executive.
Last week, Trump hosted 24 business leaders after announcing in December that he wanted an advisory panel on manufacturing. The executives split into working groups discussing potential policy changes on infrastructure, the future workforce, taxes and trade; so Trump already has a roster of talent he can tap to make those appointments.
The world of banking and finance has provided its share of central bankers, of course. The European Central Bank is run by Mario Draghi, while Mark Carney is chief at the Bank of England, both alumni of Goldman Sachs Group. Trump himself tapped former Goldman President Gary Cohn as director of the National Economic Council.
Trump, however, should resist the urge to turn to the banking community for his Fed replacements. My fellow Bloomberg View columnist Narayana Kocherlakota, who was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, argued last week that appointing "someone whose primary qualification is a fortune made on Wall Street would be a huge mistake." Fed decisions would risk being viewed as catering to the interests of the finance industry, Kocherlakota argued, leaving the central bank politically vulnerable.
He's absolutely right; but that shouldn't preclude Trump from casting his recruitment net into the business world. U.S. monetary policy has been the almost exclusive preserve of academic economists for too long.
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