John Taylor impresses Trump team for Fed chair

By The Fed FOXBusiness

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As Federal Reserve Chair Janet Yellen meets with President Donald Trump Thursday to determine if she will remain at the helm of the central bank, Fed candidate and Stanford economist John Taylor is garnering fresh attention as he’s become a preference for conservative lawmakers on Capitol Hill and some White House officials.

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Taylor met with Trump last Wednesday and he’s become a favorite of Vice President Mike Pence because he believes Taylor represents “sound monetary policy,” according to sources familiar with the matter.

When Pence represented Indiana in the House of Representatives, he tried to rein in the powers of the Fed through a bill that required it to focus only on achieving low inflation and to cut back on the so called dual mandate, which centers on stabilizing prices and maximizing U.S. employment. 

A spokeswoman for Pence declined to comment on who the vice president prefers for the job but did say he “has been heavily involved in the process for picking the Fed chair. He and the president will be on the same page when the decision is made.”  

Taylor is a professor of economics at Stanford University and served as the undersecretary for the Treasury during President George W. Bush’s first term. He’s also known for a paper he proposed in 1993 called the “Taylor Rule,” which was a recommendation about how nominal interest rates should be determined.

If the Federal Reserve followed the rule, it would raise interest rates when inflation is above target or when GDP growth is too high and above potential. On the other hand, the rule recommends the Fed should lower rates when inflation is below the target level or when GDP growth is too slow and below potential. When inflation is on target and GDP is growing at its potential, rates should remain neutral, according to the model. 

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Still, even with Taylor being the preference to lead the Fed for Pence, his need to raise interest rates may not sit well with a president who has said in the past he thinks rates should stay low. 

“I do like a low-interest-rate policy, I must be honest with you,” Trump said when asked in April about Yellen’s policies on gradually raising rates.

Predict It, which allows participants to bet on who will become the next Fed chair, has Taylor in fourth place under Jerome Powell, Janet Yellen and Kevin Warsh.

Beacon Policy Advisors, a policy research firm out of Washington, D.C., explained to clients in a note on Thursday why Pence and conservatives prefer Taylor to replace Yellen while insisting that it will likely be Powell, a current Fed governor, who will get the job. 

“A favorite of conservatives, including Vice President Pence, Taylor checks the list of accomplishments in academia, experience in Republican administrations, and espousal for a more hawkish monetary policy. Taylor's stricter adherence to systematic rules for raising interest rates does not mesh with Trump's view of keeping interest rates low to bolster asset prices though. However, optics matter more than policy for the president. Our base case is that Trump chooses Powell as chair and Taylor as vice chair, but vice-versa is also a possible outcome,” the note said. 

The decision on whether or not Yellen will stay on as chair could come as early as Friday, according to those who are part of the discussions, and, if not, Trump is leaning toward deciding next week.

A White House spokeswoman declined to comment on if the president will make his decision on Friday or next week.

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