What You Need to Know About John Taylor

By David Harrison Features Dow Jones Newswires

Stanford University economist John Taylor is the latest candidate for Federal Reserve chief to meet with President Donald Trump. Mr. Taylor, a longtime adviser to Republican presidents and presidential candidates and a former Treasury Department official, has been a vocal critic of the Fed's recent monetary policy. Here's what you should know about his views.

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On His Eponymous Rule

Mr. Taylor is perhaps best known for his "Taylor Rule," first spelled out in 1993, that he says provides a mathematical formula to set the proper level of interest rates. The rule relies on the gap between actual inflation and output and their targeted levels as well as on the interest rates that would perfectly match the supply of and demand for credit.

Central bankers have long used the rule as a benchmark against which to measure their own policy but they've been hesitant to bind themselves to it. During the long recovery from the financial crisis and the recession, the rule would have called for considerably higher interest rates than the Fed put in place. Fed officials say higher rates during that period would have harmed the economy. Mr. Taylor, though, has spent the past few years calling for higher interest rates. By some economists' estimates, his rule would currently prescribe the Fed's benchmark federal-funds rate to be 3.5%, well above its current range between 1% and 1.25%.

On Quantitative Easing

Mr. Taylor has criticized the Fed's large-scale purchases of securities, known as quantitative easing, which were aimed at stabilizing markets and lowering long-term rates to support the economy. He argued that driving down longer-term bond yields would make lenders less likely to extend credit and hold down economic growth. "Ironically, the harmful effects of these interventions lead policy makers to expand them, which further increases their harmful effects," he wrote in a Wall Street Journal op-ed in 2013. "No one should want a continuation of this vicious circle."

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Fed officials say the bond buying helped the labor market recover and the economy grow. In September, the Fed voted to start gradually shrinking its portfolio of Treasurys and mortgage-backed securities but letting them slowly mature. Mr. Taylor has endorsed the unwinding but says the portfolio at the end of the process should be smaller than the Fed's estimate.

On Fiscal Policy

Mr. Taylor has advocated shrinking the federal deficit as a way to boost economic growth even in the aftermath of recessions. He has argued that reduced government spending would reduce the need for higher taxes in the future, prompting more private investment today.

"The model doesn't account for the greater economic certainty that results from preventing the national debt from soaring to dangerously high levels and from stabilizing the federal tax burden," he wrote in a 2013 Wall Street Journal op-ed along with John Cogan praising that year's House Republican budget plan.

Many other economists have adopted the Keynesian idea that the government should boost spending during and immediately after downturns to help people get back on their feet and raise economic growth.

On Fed Independence

Like most Fed officials, Mr. Taylor supports the idea that the central bank should be independent and free from political meddling. But, he argues, the Fed's role should be strictly defined and the central bank should be held accountable by elected officials. For that reason, Mr. Taylor has expressed skepticism about the recent expansion of the Fed's regulatory oversight of financial institutions, saying that could jeopardize its independence. Instead, he said in a 2016 speech, the Fed should stick to its monetary policy mission of keeping inflation in check.

"If central banks do not have a limited purpose with accountability, they will likely become less independent in the future," he said. "Thus expanding the mission of central banks creates the risk of losing independence for the key monetary policy function."

On 3% Economic Growth

Mr. Taylor backs Mr. Trump's claim that he can raise annual U.S. economic growth to a sustained 3%. In an essay co-authored with Stanford colleagues Kevin Warsh and John Cogan as well as with Glenn Hubbard of Columbia University, Mr. Taylor argued that tax cuts, deregulation and government spending cuts could boost private sector investment and productivity.

Most Fed officials, however, have been skeptical that economic growth could be raised to that level because of structural changes such as an aging population and lower productivity growth. Ms. Yellen has said consistent 3% growth rates would be "quite challenging."

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

October 12, 2017 19:42 ET (23:42 GMT)