Editorial Board

Give Yellen Another Term

The Fed may not get everything right, but now isn't the time for upheaval at the top.

Don't mess with a good thing.

Photographer: Saul Loeb/AFP/Getty Images

President Donald Trump is weighing one of his most consequential appointments: Who should lead the Federal Reserve after current chair Janet Yellen's term ends in February? The choice comes down to whether the president wants broad continuity in the way the Fed does its job -- or a big change, and the accompanying uncertainty.

The U.S. economy has done well since the crash. The gradual recovery continues, the economy is back at full employment, and inflation is low. None of this could have been taken for granted in 2008, and the Fed deserves much of the credit. The case for continuity at the central bank is strong -- and the best continuity candidate is Yellen. Trump should appoint her for another term.

To be sure, the Fed's decisions haven't been beyond question. There's a debate to be had about the best path for short-term interest rates and the Fed's protracted reliance on its unorthodox program of bond-buying, or quantitative easing. Even now, these issues are far from resolved. Nonetheless the central bank delivered strong economic stimulus when it was needed, and for much of the time had to shoulder that burden alone, because U.S. fiscal policy was poorly managed.

Yellen and her predecessor Ben Bernanke built broad consensus within the Fed in support of radical measures, and that consensus helped restore calm and confidence in financial markets and the wider economy. It would be rash to cast these gains aside.

Yellen isn't the only candidate capable of providing continuity. Jerome Powell, a current Fed governor and former Treasury official, has been a close ally on monetary policy and would cause no anxiety on that account. (He's tended to take a softer line on financial regulation.) But two other candidates reportedly in contention -- John Taylor of Stanford University and Kevin Warsh, a former Fed governor and Morgan Stanley executive -- are long-time critics of the Fed's thinking on monetary policy.

Taylor advocates a more rule-based approach to setting interest rates. (Under the eponymous "Taylor rule," the U.S. would have significantly higher interest rates right now.) Warsh rebukes the Fed for trying to do too much, arguing that it should stick to controlling inflation and leave other branches of government to do their part.

Both these arguments deserve a hearing when the Fed is judging policy. Monetary policy isn't hard science, and in the end dissenters from the current approach might be proved right. But there's a big risk in appointing a Fed chairman whose views are so far out of line with the prevailing consensus. Investors will ask how this disagreement will be resolved -- and how abruptly, if at all, might policy change as a result.

At the moment, an abrupt change in policy isn't called for. Faster progress on normalizing interest rates and reducing the Fed's distended balance sheet would be good, but that is not to call for a fundamental rethink. An appointment raising the possibility of such a change would be a needless risk. The best and safest choice is Yellen.

    --Editors: Clive Crook, Michael Newman

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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