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The Wall Street Journal reports [2] that President Trump met with Stanford University’s John Taylor [3] on Wednesday to possibly be the next chair of the Federal Reserve. Before this news became public, expectations were beginning to grow that former Fed Governor Kevin Warsh [4] was the early favorite [5].
This is great news, and I’ve been waiting patiently for something nice to write about the Trump administration. Such an appointment would be the monetary policy [6] equivalent of appointing Neil Gorsuch to the Supreme Court.
Taylor developed a simple yet elegant mathematical definition of the Fed’s dual mandate to maximize employment under the constraint of maintaining price stability. Known as the Taylor Rule [7], this metric has increasingly become the yardstick by which the sometimes arbitrary decisions of the Federal Open Market Committee [8] have been made when setting interest rates.
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In essence, it’s the responsiveness of inflation and output to the nominal interest rate. More importantly, this is what interest rates should be if the Fed wasn’t winging it. That’s ultimately what I hope Trump can accomplish with this appointment: steering the Federal Reserve away from the arbitrary decision making it has descended to in the past decade. For a transition to a more rules-based monetary policy, John Taylor, the father of the Taylor Rule is the best man for the job.
Eric Shierman lives in Salem and is the author of A Brief History of Political Cultural Change [10].