By Rich Miller
CHICAGO - Potential candidates to head the Federal Reserve in 2018 suggested that monetary policy would be tighter if they were in charge.
Speaking at the annual American Economic Association meeting that ended Sunday, Glenn Hubbard of Columbia University, along with Stanford University’s John Taylor and Kevin Warsh, criticized the central bank for trying to do too much to help an economy struggling with problems that monetary policy can’t solve.
Fed watchers see the three, all former officials in George W. Bush’s administration, as among the candidates to take over should President-elect Donald Trump decide not to nominate Janet Yellen for another four-year term as chair when her current one expires in February 2018. Trump criticized Yellen during his successful campaign for the White House, at one point accusing her of keeping interest rates low to benefit the Democrats.
“The Federal Reserve is a little behind the curve” in raising interest rates, Taylor, a Treasury undersecretary for international affairs under the last Republican president, said Saturday during a panel discussion in Chicago.
Hubbard, who headed the Council of Economic Advisers under Bush, said he agreed with what he perceives as Trump’s stance that the U.S. has depended too much on the Fed to support the economy in recent years.
“The Federal Reserve was very successful in the initial period after the crisis but continued a policy perhaps past its shelf life,” he said during an economic association panel on which he appeared with Taylor.
The Fed raised interest rates in December for the second time since 2006 as part of a process known as normalization, after holding them near zero for seven years. Its target for the overnight interbank federal funds rate is now 0.5 to 0.75 percent. Policy makers expect to increase the range’s midpoint to 1.4 percent by the end of 2017 and 2.1 percent by the end of 2018, according to the median of their projections released on Dec. 14.
Hubbard said the Fed might accelerate its rate hikes if Trump looks like he’ll succeed in pushing through his plan for big tax cuts and increased outlays on infrastructure.
“One would expect that the normalization that the Fed was already engaged in will continue at perhaps a more brisk pace,” Hubbard said.
But he said the central bank shouldn’t rush any response and instead should take a “wait and see” approach so it can better judge the impact of whatever measures the president-elect and the Republican-led Congress look set to agree on.
“There’s a difference between policy actions that are likely to lead to overheating -- an underfunded infrastructure bill comes to mind -- versus policy changes that affect the supply side and productivity,” Hubbard said. “We don’t know yet which” it will be.
San Francisco Fed President John Williams said the economy doesn’t need a short-term fiscal boost now because it is at full employment and inflation is approaching the central bank’s 2 percent target, according to a newspaper article published Monday. "What we need is really better policies and investments in the long-term health of the economy," the Financial Times quoted him as saying in an interview Friday.
Hubbard, who is dean of Columbia University’s Graduate School of Business, reckons that Trump’s budget and deregulation plans could lift annual economic growth to 2.75 percent in coming years, from about 2.1 percent during the expansion that began in 2009.
Other policies not yet articulated would be needed to boost it higher, according to Hubbard. Trump himself has said he wants to raise growth to 3.5 percent annually.
Hubbard cautioned the incoming administration against making “aggressive” assumptions in its budget about the economic impact of its tax reforms that don’t take account of the Fed’s likely response to them.
Speaking at a different economic association panel on Friday, Warsh, a former Fed governor and Bush economic adviser, said that the composition of the eventual fiscal measures would be more important than their size in assessing their impact.
He was skeptical, though, that the Fed’s computer modeling of the economy was up to the task of making that analysis.
Warsh argued that the Fed missed opportunities earlier in the economic expansion to raise rates by pursuing what he called a “ride-the-wind” policy that was too short-term focused.
He questioned why rates are so low when the Fed is so close to achieving its goals of maximum employment and price stability. “Tell me again why interest rates seem to be so far away” from what is at least the historical target, Warsh said.
Warsh concentrated his comments on a call for widespread reform of the central bank. The Fed needs to take better account of the financial cycle in conducting monetary policy -- the ups and downs of money, finance and credit, according to the lecturer at the Stanford Graduate School of Business.
He also argued that it should stop relying so much on the “latest noise” from incoming data and instead set out a “well-defined, well-articulated strategy” for meeting its goals.
Taylor also called for changes at the Fed and repeated his support for Republican lawmakers’ efforts to get the central bank to adopt a rule to guide monetary policy.
The Stanford professor, who is known for developing his own policy rule, said such a step would make the Fed’s actions more predictable.
“We need some monetary reform,” Taylor said, adding, “Personnel is part of that.”
Two of Trump’s cabinet picks have offered at least guarded praise of Yellen. Treasury nominee Steven Mnuchin said Nov. 30 that the Fed chair has done a “good job,” and Commerce pick Wilbur Ross said she did a “reasonably good job” with a difficult situation.