Why Trump will remove Yellen, and why he won’t
By Caroline Baum
US President Donald J. Trump will be making some key announcements in coming weeks. For example, he has to decide whether to recertify the Iran Nuclear Agreement. He needs to explain what he meant when he tweeted that "only one thing will work" in dealing with North Korea. And, the big kahuna for financial markets, Trump must decide whether to reappoint Federal Reserve Chairwoman Janet Yellen to a second term.
There are good reasons to believe he will tap Yellen to stay on, offset by a compelling case for nominating a replacement. I've narrowed my list to five pros and cons. I report, you decide.
Five reasons Trump will reappoint Yellen
1. Low-rate BFFs
Trump has admitted to being "a low-interest-rate guy," which makes perfect sense for a commercial real estate mogul.
Yellen, a labour economist, has a reputation for being a low-interest-rate gal, committed to squeezing the last bit of underutilization out of the labour market in exchange for a bit more inflation.
Yellen has confessed that her Phillips Curve model may need some retooling. Her 26 Sept. speech on the relationship between unemployment and inflation could have been titled, "We don't know what we don't know."
While Yellen may be comfortable with baby-step increases in the federal funds rate with the unemployment rate at a 16-year low of 4.2%, she will back off at the first sign of adverse consequences. The dovish Fed chief has never met a discouraged worker she didn't want to help find a job.
2. Rules are made to be broken
The big debate among Fed policy wonks has always centred on the question of rules versus discretion. Should policy makers follow a battle-tested rule for setting the overnight interest rate, as advocated by Stanford economist John Taylor, whose eponymous rule provided a guidepost for the funds rate prior to the 2008 financial crisis? Or should officials be allowed to use their discretion in setting interest rates?
While the debate is not overtly partisan, conservatives tend to prefer a rules-based policy while liberals see a greater role for discretion.
Given a choice, Trump would probably prefer his monetary policy administered the touchy-feely way rather than imposed by a rule-adhering autocrat.
3. Currying favour with the weaker sex
Let's face it: Trump is a guy's guy. If he weren't a teetotaler, he would probably evaluate potential candidates for administration posts by knocking a few back together at the bar.
Viewed by some as a misogynist, Trump isn't going to change anyone's mind by tapping Yellen to serve a second term. But he would deprive the tabloids of some eye-catching headline material:
"Trump throws first female Fed chair under the bus."
4. Red-tailed doves?
Trump has been using his pen to roll back some Obama-era regulations. And he is reportedly considering two banker-types — Fed Gov. Jerome Powell and former Fed Gov. Kevin Warsh, who favour a further easing of Dodd-Frank regulatory strictures — to replace Yellen.
Don't be fooled by those regulatory doves. They are red-tailed hawks when it comes to interest rates. Warsh has been a critic of the Fed's quantitative easing programs and extended period of near-zero interest rates. Deregulation is one thing, but when push comes to shove, does Trump really want a monetary hawk at the controls?
5. Status quo ante
For all the disrupters and disruption Trump has introduced to the White House, the president is surely aware that, when it comes to financial markets, consistency and continuity may be more important than shock effect.
Yellen was first appointed to the Board of Governors in the 1990s and served as president of the San Francisco Fed from 2004-2010 before returning to Washington as Fed vice chairwoman. She has been a key member of the team steering the US expansion, now into its ninth year and the third longest on record. Perhaps this is one boat not worth rocking.
Five reasons Trump won't
1. Not his kind of gal
Trump is no doubt uncomfortable with professional women. Just glancing as Yellen's curriculum vitae is enough to make him ill. Yellen is a Ph.D Economist who has reached the pinnacle of her profession. She has a lifetime of experience in academia, government and non-governmental organizations. She is married to a Nobel laureate, economist George Akerlof, and travels in exalted circles.
Then there is Trump with his limited vocabulary, complete lack of intellectual curiosity, and slim grasp of history. No wonder he feels queasy around such an intellect. Given a choice between approach and avoidance, Trump might just head for the hills.
2. Agent Ivanka
Bloomberg News reported that Trump has met with many of the top contenders for Fed chief, including Yellen, Warsh, Powell and National Economic Council Director Gary Cohn. The stories didn't say when. There is no evidence that Trump had a sit-down with Yellen in recent weeks.
Trump did dispatch first daughter Ivanka to meet with Yellen. On the surface, that sounds a lot like fulfilling a prerequisite — "Meeting with Yellen: Check" — without facing someone you are about to fire. As uncomfortable as he is with professional women, if Trump were planning to reappoint Yellen, he might just want to talk to her first, face-to-face, if only to assess her degree of fealty.
3. Rules and Regs
While Trump likes to take credit for every uptick in the markets and any positive piece of economic news, the one thing he has actually done is roll back or cancel existing or planned regulations affecting the labor market, the environment and public health.
It is true that many regulations would not stand up to a serious cost/benefit analysis. That said, Yellen is on record supporting banking regulations put in place following the 2008 financial crisis, just the sort Trump is hoping to eliminate.
Also read: Warsh would be strange pick as Fed chair for a president who says he cares about jobs
4. Because he can!
Trump often acts out of childish instinct, doing something because he can — "Look ma, I'm president!" — rather than because it makes sense. All it would take is some perceived slight from Yellen, some comment in a speech Trump interprets as critical of his regime, for the president to use her for target practice.
5. Anything you can do, I can do better
Every president since Jimmy Carter has reappointed the Fed chief he inherited from his predecessor. Obama selected Yellen. What better reason for Trump to say, "You're fired?"
There you have it. Les jeux sont fait, as the French would say. What will Trump do?
My two cents, having crafted the list of pros and cons, is that the reasons in favour of Yellen's reappointment are more solid. Your move, Mr. President.
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