When the president announced the appointment of Jerome “Jay” Powell as the new chairman of the Federal Reserve, the prestige newspapers responded with a yawn. They had already reported Powell’s name several days earlier, when the White House leakers fed it to them. This leak gimmick enables Trump to test-market his choice (and change it if reactions are negative), while favorite reporters get to pose as insiders.
Powell’s nomination was thus treated as old news. Except the media missed the real story. Choosing a successor to replace Janet Yellen as chair of the central bank was, arguably, the most important appointment Trump will make during his first term. If he has chosen badly and the new Fed chairman crashes the economy with punishing interest rates, there will be no second term for Donald Trump.
Trump evidently understood this risk. He met several times with Yellen and lavishly praised her strong stewardship. Monetary policy is one area of government that Trump intimately understands—his gold-plated fortune requires it. He is a builder but also a borrower. The Federal Reserve has life-and-death powers over builders and borrowers, especially if it decides to tighten credit by driving up interest rates. When that happens, a smart deal can suddenly look like a loser.
So builders and bankers both have a peculiar codependency on the Fed. Builders yearn for lower interest rates to sweeten their deals. Bankers lobby the Fed for higher interest rates, ostensibly to insure a sound currency but really to insure their own profitability.
Before Trump announced his appointment of Powell, I consulted an expert, Paul McCulley, who for many years was the brilliant monetary forecaster at PIMCO, the giant investment firm, where he was managing director. McCulley achieved global celebrity a decade ago for predicting the financial crash, when most Fed watchers—including the Federal Reserve’s own leaders—didn’t see it coming. McCullley also understands the politics of monetary decisions (now retired, he teaches at Cornell Law School). Professor McCulley confessed that he had voted for Hillary Clinton, even though he expected Trump would probably choose a more aggressively pro-growth leader for the central bank—someone as smart as Janet Yellen.
“Logically, Trump is an easy-money man,” McCulley surmised. “What I do know is Trump has no hard-wired economic philosophy. Trump likes to build things with other people’s money and put his name on them. Building with cheap leverage—that is his de facto ideology.”
What would McCulley tell Trump if he asked for advice? “If Trump wants to be reelected in 2020, he should reappoint Janet Yellen,” McCulley said. “Because she won’t be mean and nasty toward accommodating fiscal policy.” In other words, Trump’s outlook and life experience, including the occasional bankruptcy, suggest a risk-taking, borrow-and-build boomer. “Ironically,” McCulley said, “this is very Keynesian and appropriate right now.”