(Repeats item originally published on May 5, no changes to
By Howard Schneider and Ann Saphir
PALO ALTO, Calif. May 5 Unemployment is at a
decade low, the American economy is growing, and inflation is
nowhere in sight, yet for two leading candidates to head the
Federal Reserve, the central bank needs shaking up.
The Fed is credited by most economists for its rapid
response to the 2008 financial crisis. Under Chair Janet Yellen
whose term expires next year, it has been able to shift into
post-crisis mode, ceasing to add to its balance sheet and
embarking on a series of rate hikes that will take interest
rates back to "normal".
For former Wall Street banker Kevin Warsh, who served as a
Fed governor at the time of the financial crisis, the economic
recovery is characterized by bloated central bank balance
sheets, financial risks, and a hidebound institution that needs
"We should not allow a failure of imagination, a failure of
courage," to impede changes to how the Fed is run, Warsh said in
remarks at the Hoover Institution, an intellectual home of
conservative economics where he is a visiting fellow.
While he did not refer to a potential candidacy for the Fed
Chair job, Warsh's speech struck some in the audience as an
audition. Warsh and Stanford University economics professor John
Taylor have emerged as potential frontrunners to succeed Yellen
whose term ends in February 2018.
Warsh, a Wall Street lawyer by training rather than one of
the Phd economists who have come to dominate monetary policy in
recent years, called for "fresh air from the real side of the
economy, fresh air from the markets," in revamping the Fed.
He says the central bank has left the public confused, lacks
a long-term strategy, and is too beholden to short-term stock
market and other events.
Warsh, who was consulted frequently by former chair Ben
Bernanke when at the Fed, was speaking at the Hoover
Institution, a center of conservative thinking on monetary
policy that has in recent years tried to amp up its profile in
the Washington policy debate.
Along with being close to Bernanke, Warsh has family
connections to President Donald Trump, and is on one of the
president's White House advisory panels - advantages some feel
put him on any short list for consideration.
IF TRUMP WANTS RULES, THERE IS TAYLOR
Hoover is also Taylor's intellectual base.
Taylor is a favorite among Republicans who feel the Fed
should be held closely to a formula, a "Taylor rule", for
setting interest rates and give up some of the discretion
policymakers currently enjoy.
The list of possible chairs is a long one for a president
who has surrounded himself with a not always coherent set of
economic advisers -- from trade skeptics and gold standard
advocates to Wall Street insiders.
At this point Trump has not indicated whether he thinks the
Fed needs fundamental reform. He has not taken much interest in
the nuances of monetary policy and has three open vacancies on
the Fed's seven-member board of governors.
Trump, who is skeptical of the statistics that are the
current Fed's stock-in-trade, also has not indicated whether he
is inclined to stick with an economist like Taylor to run the
central bank or will turn to a Wall Street figure like Warsh, as
he has done for other top economic appointments
While attending a two-day conference, neither Warsh nor
Taylor referred publicly to whether they want to be Fed chair.
But neither were shy in saying they think the Fed and monetary
policy needs to change.
In a speech on Thursday night, Taylor compared current times
to the situation Paul Volcker faced in the 1970s when he
wrangled a sometimes resistant Fed board to battle inflation
with aggressive interest rate increases.
The implication: that it would be possible to steer a
reluctant central bank towards the sort of regime he and some
members of Congress feels it needs, where rules are agreed for
setting interest rates and followed as closely as possible.
Commercial banks would also be freed from regulation if they
agree to set aside more capital, and the U.S. would make the
case internationally for a more rules-based central bank system.
"The idea is a package” of changes that the central bank
could adopt to overcome what he feels are potentially
"destructive" divisions over policy, Taylor said.
But some policymakers listening to both Warsh and Taylor
wondered whether Trump would actually want the kind of radical
change outlined at Hoover.
St. Louis Fed president James Bullard told Reuters that with
the Fed hitting its targets, Trump might not want to pick
“somebody that's going to deviate substantially from the
(Editing by Chizu Nomiyama)