"Continuity" At Fed, Not Best For Long-Term

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.