Written exclusively for InTouch Capital Markets
22nd January 2018
President Trump is getting closer to nominating a successor to retired Federal Reserve vice chairman Stanley Fischer, and two possibilities are former Fed Governor Lawrence Lindsey and San Francisco Federal Reserve Bank President John Williams.
“Larry” Lindsey acquired something of a dovish reputation as a member of the Fed Board of Governors from November 1991 to February 1997, a period roughly coinciding with the administration of President George H. W. Bush and the “credit crunch” that grew out of the savings and loan crisis.
But “hawk” and “dove” labels can be misleading. As economic and financial conditions change sensible policymakers modify their views of appropriate monetary policy.
When I interviewed Lindsey and then-Fed governor Janet Yellen in September 1996, they were willing to support raising the federal funds rate from 5.25% but not aggressively. Lindsey told me “a yellow light” was flashing caution on inflation, but as yet saw “no obvious sign of price pressures,”
The Harvard-educated economist told me a recent 0.5% jump in average hourly earnings “confirmed other indicators that there are the beginnings of an upward movement in wages,” but he did not expect “a whopping increase” in consumer prices. Comparing the 5.25% funds rate with a 3% inflation rate, Lindsey saw the real funds rate as near the level necessary to restrain demand and inflation. “It may be that 5 1/4, at a 2 1/4% real funds rate or whatever is, for the long-term, the right number.”
But Lindsey, now 63, sounded anything but dovish when he urged the Fed last February to raise rates to pre-empt inflation. “We’ve piled up this giant bonfire of liquidity in the form of central bank balance sheets,” he warned. “I think we have to watch that very, very closely.” If the Fed didn’t act it would be “very far behind the curve. We have a risk of global inflation unless we start containing it now.”
Lindsey burnished his reputation with prophetic comments on the stock market in September 1996. As FOMC transcripts reveal, he questioned bulls’ earnings hopes, predicting, “profits will fall short of this expectation.”
“The long term costs of a bubble to the economy and society are potentially great….,” he warned. “(T)he case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights.”
Lindsey would undoubtedly take a friendly view of the Trump tax cuts, having backed the Reagan tax cuts from a supply-side perspective and been an architect of the 2001 tax cut as President George W. Bush’s top economic advisor.
But Lindsey can act independently. As I reported from the February 2001 Group of Seven meeting in Palermo, he clashed with Treasury Secretary Paul O’Neill and raised concerns among the G-7 when he took a harder line against foreign exchange intervention.
Williams also has impressive credentials. A former senior Board staffer, he became Yellen’s director of research when she headed the San Francisco Fed, then took her place when she became chairman. Williams is not as conservative as Lindsey or for that matter his Stanford University mentor John Taylor, but he’s a leading monetary thinker, having extensively researched the shifting real equilibrium interest rate (r*).
Williams’ record shows admirable objectivity. After advocating keeping the funds rate near zero long after the financial crisis, he helped spearhead normalization. In early December 2014 — more than a year before the FOMC started raising the funds rate after six years near zero — he told me “mid-2015” was “a reasonable guess” for “lift-off.”
In January 2014, seven months after hints of reduced bond buying triggered the “taper tantrum” and less than a month after the FOMC began trimming purchases, Williams said, “assuming the economic recovery plays out as we expect, we will likely continue to reduce the pace of those purchases, and eventually eliminate them, over this year.”
Williams, 55, has continued to support tightening to “prevent overheating.” Last April, he wouldn’t rule out raising the funds rate more than three times in 2017.
Yet Williams argues a declining neutral rate portends more frequent visits to the zero lower bound, requiring “unconventional” measures like large-scale asset purchases and “forward guidance.”
Whatever their circumstantial views, Lindsey or Williams would bring one important trait to the job. Like Fischer, they have PhDs in economics to go with ample monetary experience. And as a long time Fed insider told me about filling the vice chairmanship and the New York Fed presidency, “It’s really critical that one be a really solid economist…If neither one’s an economist …God help us.”
Steven Beckner is a veteran financial journalist with four decades of experience of reporting on the Federal Reserve. Mr Beckner is the author of Back From The Brink: The Greenspan Years (Wiley, 1997) and can also be heard speaking regularly on National Public Radio.