Janet Yellen should keep her job. Donald Trump seems to agree.
Since the passage of the Banking Act of 1935, which created the Federal Reserve as we know it, only two Fed chairs have not been reappointed to a second term (and one of those, Bill Miller, was “promoted” to Secretary of the Treasury). Could Janet Yellen — the first female chair and one of the most powerful women in American history — be the third?
Despite a batting average that would put her in the central banking hall of fame — 4.3% unemployment, inflation a bit below 2%, and low long-term interest rates — the betting markets and polls of economists suggest she is the underdog to keep her job when the chair term ends in February. She doesn’t even make CNBC’s leaderboard.
In a July 25th conversation with The Wall Street Journal President Trump said he really likes Yellen, wants Gary Cohn to stay at the the White House, and doesn’t care to talk about other candidates. This is a long excerpt, but worth the full read:
BAKER: While we’re on the economy, can I ask you, we’re coming up very soon to the time to decide whether or not to reappoint Janet Yellen as the –
TRUMP: Yes.
BAKER: — chair of the Federal Reserve or to appoint somebody else. Are you — have you reached a decision?
TRUMP: I have a lot of respect for her, and I like her. I’ve met her just a couple of times, but I like her. It’s early to make the decision. She doesn’t come up until February/March?
MR. : End of June.
WSJ: February. February 1st is –
WSJ: Yeah, yeah.
TRUMP: No, I have a lot of respect for her. I like her. She is –
BAKER: Does that mean it’s possible you would keep her?
TRUMP: I do like low interest rates. I mean, you know, I’m not making that a big secret. I think low interest rates are good. I like a dollar that’s not too strong. I mean, I’ve seen strong dollars. And frankly, other than the fact that it sounds good, lots of bad things happen with a strong dollar.
BAKER: So she’s definitely — she’s definitely in the running to be replaced this time?
TRUMP: I would say — you mean to stay?
BAKER: To stay.
TRUMP: I would say yes, she is in the running to stay.
WSJ: Is Gary a candidate? (Laughter.)
TRUMP: He doesn’t know this, but yes, he is. (Laughter.)
WSJ: Are there other candidates?
TRUMP: I actually think he likes what he’s doing right now.
BAKER: That’s what he tells us.
TRUMP: Don’t tell Gary what I just said.
WSJ: Are there other candidates?
TRUMP: Yeah, there are two or three. But she is — she is in the running, absolutely. I like her. I like her demeanor. I think she’s done a good job. I’d like to see rates stay low. She’s always been — you know, she’s historically been a low-interest-rate person, a believer.
…
WSJ: Are there other names?
WSJ: Are there other names you might offer who are in the mix for the Fed?
TRUMP: I’d rather not do that.
BAKER: Kevin Warsh has been mentioned. Can we — [inaudible] –
TRUMP: I haven’t — I’d rather not get involved. But I would say she is, certainly. And Gary is somebody that I’ve gained great — I’ve known Gary for a long time — but I’ve gained great respect for Gary working with him. So Gary certainly would be in the mix. I just don’t know if he’d like — this is off the record — if he wants to sit down. Interest rates will be moving up one-eighth of a point –
BAKER: That’s the exciting stuff. (Laughter.) That’s the exciting stuff.
TRUMP: Right? Yeah, exactly. And then you leave. By the way, then the market crashes and it goes through the roof. You know, what you say. And then he goes off and he’ll play golf and relax for the next 30 or –
BAKER: So, Gary, Yellen, and there are other contenders you’re thinking of?
TRUMP: Yeah, there are people that are highly respected that I would certainly think about. I don’t know that Gary would want it. I think Gary loves what he’s doing, you know, and he’s doing a very good job.
Without the full transcript, the initial stories about this interview — for example, “Trump says he’s considering top aide Gary Cohn for Fed Chair” — were a bit misleading. In context Trump’s comment about Cohn’s Fed chair candidacy seems more like a friendly pat on the back. Trump very quickly says, “I actually think he likes what he’s doing right now” and twice more suggests that Cohn should stay in his current role.
Is it possible that even Trump knows Yellen is the obvious pick? It’s not just her record. Reappointing Yellen would be good for Trump:
- The conservatives who will fight a Yellen nomination favor candidates like John Taylor and Kevin Warsh who will raise interest rates and choke off job growth; Yellen will let unemployment go lower for longer;
- Yellen doesn’t do politics…even when Trump lashes out at her;
- “Regulatory relief” is coming and Yellen won’t stand in the way; and
- New Fed Chairs have had very rocky starts.
Jobs, jobs, jobs
Stanford professor John Taylor would love to become Fed chair to show that his academic theory — the Taylor rule — actually works. Unfortunately, following the Taylor rule over the past few years would have meant millions of fewer jobs today (the Minneapolis Federal Reserve estimates 2.5 million). If the Fed were implementing the Taylor Rule today the federal funds rate would be at least 3%, more than 200 basis points higher than it is.
Since the middle of 2009 Kevin Warsh has cycled through an eclectic set of reasons the Fed shouldn’t try to bring down unemployment levels. It appears his north star is a higher interest rate, and he will follow whatever argument leads him there. If Trump continues to prefer a weaker dollar — a long-held position — he would find a foe in Fed Chair Warsh. This is one of Warsh’s many defenses of a strong dollar:
I would say that the academy’s view, the broad view of folks at the IMF and economics departments at elite universities, is that if only the dollar were weaker, then somehow we’d be getting this improvement in GDP arithmetic, we’d have an improvement in exports and we’d be getting much closer to trend. That’s not a view I share.
Yellen has brought the unemployment rate from 6.7% to 4.3% despite howls of protest, including from the candidates to replace her, that she would push the economy into a crisis. She could have waited even longer to begin raising rates but that is a relatively minor quibble. Ultimately she accepts that “returning to normal” is less important than delivering on the Fed’s mandates, including shooting for full employment. Her book Fabulous Decade hails Alan Greenspan’s willingness to hold off on interest rate increases and allow the unemployment rate to fall below 4% and remain below 5% for almost four years. If productivity ticks up, she could do the same in the years to come.
Apolitical
Trump’s closing campaign ad included Janet Yellen as a member of the cabal of elites he would fight as president. People don’t remember that because Yellen never hit back. In fact, she has taken great pains not to criticize Trump. This is a typical answer to a question about Trump from her press conference in June:
PATRICK GILLESPIE. Chair Yellen, Patrick Gillespie with CNN. It’s workforce development week at the White House, and you highlighted several job training — successful job training programs in your speech in March. The President’s budget has a 40 percent cut to job training programs. What is your response to the budget cut to job training programs even though they expect to expand apprenticeship programs? And do you believe that job training programs and apprenticeships are needed to help fix the job skills gap in the economy?
CHAIR YELLEN. Well, I’m not going to comment on the President’s budget, and these programs can be undertaken at many different levels. I’ve seen many nonprofits and states and local authorities put in place programs that looked to me to be successful.
She’s a protect-the-institution-before-herself kind of public servant. Escalating a fight with Trump risks the Fed’s credibility as a non-partisan actor and even its policymaking independence if a feud got really bad. This presents an asymmetry that could be quite useful to Trump. If the economy or markets falter, he can blame her without provoking a response.
Even if she won’t return Trump’s fire, there is an obvious risk in keeping on someone nominated first by Bill Clinton and then Barack Obama. She could use interest rate policy to hurt Trump’s reelection prospects. But, her record suggests Trump need not worry about that possibility.
In September 1996, two months before Clinton — who put her on the Fed’s policymaking committee — was up for reelection, Yellen privately lobbied Chair Greenspan to raise rates, which would have had the effect of slowing economic activity.

President Clinton’s political advisers would have been furious! In her long tenure at the Fed Yellen has shown not a shred of evidence that she is driven by partisan considerations.
Moreover, nominating a Fed chair from one’s own party often doesn’t work out as presidents hope. In the closing months of the 1980 election campaign, with unemployment and interest rates elevated, President Carter publicly criticized Paul Volcker, whom he had chosen to lead the Fed.

Though Alan Greenspan had been an advisor to a number of Republican presidents, George H.W. Bush believes his policies decided the 1992 election in Bill Clinton’s favor: “I reappointed him, and he disappointed me.”
Regulations
Perhaps the single unifying force holding together the Trump economic team is hatred of government regulation. Everyone from Cohn to Mick Mulvaney to Steve Bannon seems to agree that there are too many bad rules.
Yellen seems open to changing many of them. She leaned heavily on Dan Tarullo, the aggressive “Sheriff of Wall Street,” to regulate the financial sector. His departure from the Fed in April and the likely confirmation of industry-friendly Trump nominee Randal Quarles to replace him will mean a shift in how the Fed oversees financial institutions. Already Fed Governor Jerome Powell has indicated that adjustments will be made in a number of areas, including the Volcker rule, living wills, and stress tests.
At her June press conference Yellen had mostly positive things to say about the blueprint released by Trump’s Treasury Department:
Regulatory burden, when it’s possible to ease it, and a good deal of the Treasury report is focused on regulatory burden, that’s something that all regulators should be looking to do. We strongly believe in the importance of tailoring our regulation to the size and complexity of institutions, of finding ways to relieve burden for community banks. We have been focused and had a number of initiatives already in that direction, looking for ways, for example, to simplify capital requirements for community banks. And we’ll continue in that direction and, in that sense, in those areas certainly share the views expressed in the Treasury report. So there are a number of areas and suggestions where our thinking aligns well. There is probably some areas where we’re likely to have differences but quite — you know, quite a number of areas where we’re, you know, likely to be able to and already are taking actions that are consistent with those recommendations.
In July, Binyamin Applebaum of The New York Times described her testimony to the Senate Banking Committee as “carefully conciliatory, repeatedly agreeing that some rules might be too strict, and expressing a general willingness to consider changes.”
The Rocky Beginnings for New Fed Chairs
In Paul Volcker’s second meeting as chair, the Federal Open Market Committee began explicitly targeting monetary aggregates. According to his sympathetic biographer William Silber, “Volcker hoped that the credibility conferred by the new monetary procedures would produce two different interest rate effects…He would be disappointed.” Silber went on:
“Volcker thought the procedures announced on Saturday evening October 6, could work in reverse. Higher short-term rates to fight inflation and lower long-term rates because investors believed that the Fed’s new look would succeed. This twist in the yield curve would have confirmed the Fed’s credibility. The market delivered a sobering message, and not just to Volcker.”
The lede from this October 12th The New York Times article sums things up:

TIME put Volcker on its gloomy cover two months into his term.

Five months into Volcker’s chairmanship America was in a recession.
Alan Greenspan came to be known as “the maestro,” but that was long after the Dow dropped 22.6% in 1987, the largest one-day decline in the history of the stock market. He was two months into his first term as Fed chair.


The Wall Street Journal’s Tim Metz describes Greenspan’s role in the run-up to the crisis:

Shortly after Black Monday The New York Times wrote about the longing for Greenspan’s predecessor and lack of confidence in him:
Paul Volcker’s telephone keeps ringing. The callers ask for his advice or sound him out on how much damage has been done. Even out on the street, Volcker can’t escape his questioners. At 6 feet, 8 inches, he is hard to miss. So people stop him to ask, ‘’Are we going to be all right?’’ or to say, ‘’We need you back in Washington.’’…
…The stock market lives on confidence, particularly confidence in those charged with managing the economy, and when that confidence fails, the market falls. Indeed, some economists are saying that one reason there is growing fear of an economic catastrophe, following the worldwide stock-market plunge, is that the Reagan Administration let Paul Volcker go, replacing him with the less-experienced and less-well-known Alan Greenspan.
It took two years for the Dow to rebound fully.
Ben Bernanke replaced Greenspan in 2006 and gave himself a C- grade for his performance during the first few years on the job, which was the run-up to the Great Recession.
Is President Trump willing to tolerate the months-long or years-long growing pains of a new Fed chair when the person who holds the job now is producing steady gains in jobs and a strong stock market?