Forget Brexit: Here's the single most important decision for the world economy
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Forget Brexit: Here's the single most important decision for the world economy

Barack Obama. Warren Buffett. Paul from Bake-Off. There are lots of people you would probably rather put in charge of choosing the next chairman of the Federal Reserve than Donald Trump.

With his chaotic approach to staff management, his short attention span and his addiction to short-term populism, the Donald is just about uniquely unqualified to assess the right candidate for what may well be the most technically challenging job in the world.

The trouble is, he is the person who is going to have to make the call, and make it very soon. That might seem a largely American issue. But in fact, it matters to the rest of the world, and even more this time around than usual.

Why? Because the president is so unstable, a rock steady presence at the Fed is more vital than ever; because the US is embarking on a unique and high-risk experiment in normalising monetary policy; and because, despite challenges, the US remains the world's crucial source of economic growth.

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If there is a yes-man (or woman) at the Federal Reserve, the markets will be rightly worried that it might actually happen.

If there is a yes-man (or woman) at the Federal Reserve, the markets will be rightly worried that it might actually happen.Credit:Bloomberg

Forget the state of the Brexit negotiations, or whether China's electrifying growth can be sustained. This is the one decision that will have the most impact on the global economy this year.

Janet Yellen's term chairing the Federal Reserve - the first woman to hold the post - expires in February next year. The norm is for the person running the central bank to be re-appointed for a second term, and often for far longer than that. The legendary Alan Greenspan held the job for an epic 19 years. William McChesney Martin held the job from 1951 to 1970, serving five presidents. Against those kind of runs, four years hardly seems like enough time to find out where the office canteen is.

Trump looks set to end the tradition of leaving the incumbent in place. He said over the summer he was "considering" her re-appointment, but this month has held several meetings on the subject, and has now released a shortlist of five possible candidates from whom the next chairman will be picked.

Yellen is on the list but so are the Stanford economist John Taylor, the serving board member Jerome Powell, and three more potential candidates. Wall Street is betting that there will be a change at the Eccles Building in Washington where the bank is headquartered, while the bond markets have been largely driven by speculation on who will get the job. The White House has said a decision will be made before the president leaves for Asia at the end of next week.

Donald Trump probably thinks this is like an episode of The Apprentice. If the ratings are dropping, you bark "You're fired" and move onto the next person.

Donald Trump probably thinks this is like an episode of The Apprentice. If the ratings are dropping, you bark "You're fired" and move onto the next person.Credit:AP

Yellen has not exactly set the world alight, but firing her after one term is unfair. Her record is perfectly credible. Growth is running at more than 3 per cent. Unemployment is down to 4.2 per cent. Wages are growing and inflation is subdued.

Unlike her predecessor Ben Bernanke she has not had a major crisis to deal with, just a gradual recovery process. But she has managed to nudge the economy on to a slightly faster growth path without any drama, and that is a harder task to pull off than it might appear.

Janet Yellen has not exactly set the world alight, but her record is perfectly credible.

Janet Yellen has not exactly set the world alight, but her record is perfectly credible.Credit:Chris Ratcliffe

Even so, Trump probably thinks this is like an episode of The Apprentice. If the ratings are dropping, you bark "You're fired" and move onto the next person.

In any normal year, choosing a new Fed chairman would be a largely a matter for Americans, with some interest from bankers and bond traders around the rest of the world. Everyone else could concentrate on something more interesting. This time around, however, it is crucial to how the global economy performs over the next four years.

John Taylor, professor of economics at Stanford University, is seen as a front runner for the most challenging job in the world.

John Taylor, professor of economics at Stanford University, is seen as a front runner for the most challenging job in the world.Credit:Andrew Harrer

Trump is such an erratic, volatile president the markets need someone stable running the Fed to convince investors and businesses that monetary policy is being run by a grown-up. Who knows what wacky ideas Trump might suddenly come up with during a late-night tweet-storm.

First, Trump is such an erratic, volatile president the markets need someone stable running the Fed to convince investors and businesses that monetary policy is being run by a grown-up. Who knows what wacky ideas Trump might suddenly come up with during a late-night tweet-storm.

Returning to the gold standard? Putting interest rates back up to 5 per cent in one go? Scrapping the dollar, and replacing it with the rouble overnight, in honour of close friend Vladimir. OK, that last one might be a little far-fetched, but Trump is perfectly capable of pushing some half-baked economic conspiracy theory on the spur of the moment.

If there is a yes-man (or woman) at the Federal Reserve, the markets will be rightly worried that it might actually happen. A strong, independent chairman will reassure everyone that the wackier ideas will be killed off in an instant.

Next, the American economy remains the most important in the world, and Fed policy affects the global economy. You can argue that in purchasing power parity terms, China has now overtaken the United States, and that the US dollar is no longer the dominant force it once was. There is some truth in that.

Even so, for the next decade at least, the US is going to hold on to its pivotal role in the global economy and the greenback will remain the world's reserve currency. The Fed chairman is the single most crucial player in the money markets.

Finally, the US is embarking on a unique experiment in normalising monetary policy by raising interest rates and reversing quantitative easing. Yellen has already raised rates three times, and may well do so again before the close of 2017. Central banks had cut rates to close to zero before - the Bank of Japan started that trend - but none has ever tried putting that into reverse.

So far it has gone better than could have been expected, but there is still a long way to go. How that works out will determine what central banks everywhere else do, and not least in this country. If the Fed can get rates to 4 per cent or 5 per cent, we will eventually see that in other economies as well. If it all goes wrong, zero rates will be around for a couple of decades, as they have been in Japan.

There are dramatic differences between the candidates. John Taylor has been a fierce critic of Fed policy, and would likely bring a far more theoretical economic approach to the role, and would probably be more aggressive on normalising policy. So would Kevin Warsh, who resigned from the Fed in 2011, after disagreeing with a second-round of quantitative easing.

Jerome Powell would be a safety first candidate, and so of course would be Janet Yellen. Either would make the markets more comfortable.

We spend a lot of time worrying about Brexit and the other factors that will influence the global economy over the next year.

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But probably the most important will be who is the next chairman of the Fed - and we should find out who it is next week.

Telegraph, London

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