Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       

Blog Home
   Brian Wesbury
Chief Economist
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
  "Continuity" At Fed, Not Best For Long-Term
Posted Under: Government • Monday Morning Outlook • Fed Reserve

The short-short list for new Fed Chair includes Janet Yellen, Fed Governor Jerome Powell and Stanford economist John Taylor, the author of the "Taylor Rule."

Right now Jerome Powell – a former Wall Street executive at Dillon Reed – is the runaway favorite.  Taylor and Yellen are a very distant second and third.

The Trump Administration apparently wants to put its mark on the Fed, but at the same time insure "continuity."  After all, equities have been hitting record highs, jobs and growth are going well.  Why rock the boat?

But maybe the Fed needs some boat rocking, like both Paul Volcker and Alan Greenspan did.  Volcker stopped targeting interest rates and targeted money supply growth.  Greenspan initially focused more on inflation believing that unemployment was minimized over time if inflation was low and stable.

In Greenspan's later years at the helm, and then under Ben Bernanke and Janet Yellen, the Fed adopted a kitchen sink approach to monetary policy.  The Fed worries about jobs, wages, equity prices, housing markets, long-term interest rates, and even inequality.  Fed regulators are now so powerful, banks manage their businesses to respond to regulators, not markets. 

The Panic of 2008, which was in part caused by Greenspan's 1% interest rates, helped the Fed gather this new mandate to manage the economy.

Rather than accepting this broadened mandate, we think a new direction for the Fed might be best in the long-term.

The "Taylor Rule" would have avoided the inflation of the 1970s and helped avoid the 2000s housing bubble.  His rule would have allowed the Fed to lower rates sharply in the 2008 Panic, but avoided the prolonged period of super low rates ever since.

His rule would help create a modest and humble Fed, rather than a super-powerful Washington entity who some say has little accountability to elected officials.

Many worry that Taylor would jack up rates right now, but the leader of the Fed has only one vote.  A major change in Fed policy would take years of steady and patient leadership. By the time tides shifted, the "Taylor Rule" might signal even lower rates than current policy.

We don't know who the President will pick.  But we know the current path of Fed policy will not change overnight, regardless of the next Fed Chair.  That's fine for markets in the medium-term, but in the longer-term what's best for the U.S. economy is not "continuity."     

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Click here for PDF version

Posted on Monday, October 30, 2017 @ 9:29 AM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2022 All rights reserved.