A Trump Loyalist for Chairman of the Fed?

One place President Trump might look for a candidate for the next chairman of the Federal Reserve is the opinion section of his least favorite newspaper, the Wall Street Journal. It’s out with a piece today by one prospect for the job, David Malpass. He is making a substantive pitch for “foundational change” to the Fed. What he eyes could include Mr. Trump’s search for lower interest rates while opening discussion on monetary reform.We don’t want to make too much of that. Mr. Malpass, an erstwhile president of the World Bank whose columns have appeared now and again in the Sun, has always stopped short of plumping for full monetary reform that includes defining the dollar as a legislated weight of gold or silver. His piece in the Journal today, though, suggests that he is in favor of some monetary reform, including a price rule that would orient Fed policy toward stable prices.Mr. Malpass reckons, as his headline puts it, “The Federal Reserve Doesn’t Have To Be an Enemy of Growth.” He suggests that a “larger-than-expected” rate cut in September could, along with broad reforms, “make America prosperous again.” A problem confronting the central bank today, Mr. Malpass contends, is that its models “rely on lagging estimates of prices,” while they “ignore weakness in the dollar’s purchasing power.” The Fed’s goal, Mr. Malpass says, should be “defending the dollar and expanding its use as the world’s reserve currency” — a Trump priority. It would mark a change for the Fed, which was formed in 1913 as a steward of the dollar, yet has presided over a plunge in the currency’s value. When the Fed was created its enabling legislation pledged not to traverse the terms of the Gold Standard Act of 1900, which valued the dollar at a 20th of an ounce of gold, the historic basis of worth.In the intervening decades, though, the dollar’s value has plummeted to little more than a 3,350th of an ounce of gold. That plunge is partly the result of presidential malfeasance, like FDR suspending the gold standard and President Nixon closing the gold window in 1971, ushering in the age of fiat money. Yet Fed policies, too, like pursuing a steady pace of inflation of some 2 percent a year, have fueled the problem.Another Fed mistake has been the racking up of a multitrillion-dollar balance sheet under the guise of Quantitative Easing, first instigated under Chairman Ben Bernanke. Despite the warnings of inflationary risk, Mr. Bernanke waved away the concerns over the unprecedented expansion, arguing “we could raise interest rates in 15 minutes, if we have to.” Yet when the worst inflation in some 40 years struck in 2021, the Fed appeared powerless to address it.Mr. Malpass points to the Fed’s bloated balance sheet as another area in which reform is needed. “To justify its $6.7 trillion in assets,” he writes, “the Fed asserts that banks need to maintain a high level of loans” to the central bank, while claiming this “doesn’t crowd out small-business loans.” It’s an example of how the unintended consequences of the Fed’s monetary experiments can imperil growth.Mr. Malpass says “the Fed’s outdated antigrowth models work strongly against” the expansive agenda sought by Mr. Trump. To resolve that tension, without fueling inflation, would, in our view, suggest the need to liberate the Fed from its contradictory dual mandate. Mr. Malpass, though, has argued that a stable dollar is the best path to growth and full employment. He suggests that a focus on defending the dollar — a so-called price rule — offers a sounder approach.

A Trump Loyalist for Chairman of the Fed?

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