In the coming weeks, President Trump will exercise his constitutional duty in announcing his choice for the next chair of the Federal Reserve System, perhaps the most important personnel decision of his young presidency.
Recently the president suggested that Janet Yellen, the current chair, is in the race, something both political commentators and betting markets continue to dismiss. After all, Yellen is an Obama holdover and was confirmed to her post with the least senatorial support of any chair in the Fed's history. Given Republican control of the White House and Senate, and the charged partisan climate in general, pundits have already been writing Yellen's political obituary.
They shouldn't. Janet Yellen is by far the best candidate for the job and should be Trump's choice for another appointment for three reasons: history, competence, and management.
First, history. There is a strong norm in Fed history for cross-partisan appointments for the Fed chair. Beginning with Dwight Eisenhower's reappointment of Democrat William McChesney Martin in 1955 and extending to Barack Obama's reappointment of Republican Ben Bernanke in 2009, presidents have nearly always reappointed their predecessor's Fed chairs, whatever that predecessor's party. In modern history, only one Fed chair hasn't had a cross-partisan reappointment when given the chance: Republican Arthur Burns, most often credited with ushering in the 1970s-era Great Inflation, was not reappointed by Jimmy Carter.
One of these cross-appointments is worth highlighting in particular. When Ronald Reagan won the 1980 election with a surprisingly strong electoral mandate, his team was eager to clear Washington of Carter appointments, with Fed Chair Paul Volcker mentioned as someone who would not be reappointed. The argument for dumping Volcker became even more persuasive after the 1982 midterms, when Democrats made significant gains in the House of Representatives largely due to a recession triggered by Volcker's own tightening monetary policies.
Nevertheless, Reagan made perhaps the best economic-policy decision of his administration in reappointing him. The move reassured markets that the administration's ambitious fiscal policies of expanding the defense budget and cutting taxes would not lead to the runaway inflation that had dominated the political scene for more than a decade. Volcker's tenure is rightly heralded by the left and the right as a high mark in the Fed's history.
Trump should embrace Reagan's mantle. The temptation to install a close confidant will no doubt present itself, but the norm for a cross-partisan reappointment serves the vital need of monetary stability in a way that cannot be matched. Renominating Yellen will rightly be seen as an exercise in leadership and discipline, just as it was in 1983 with Volcker.
Norms are not ironclad, of course, and reappointment is by no means a central banker's birthright. The second reason to reappoint Yellen is more individual: She is not the caricature of monetary malevolence that she has been painted to be, nor is she some kind of egg-headed academic unfamiliar with the ways of the world. She is, in fact, the single most experienced central banker in the Fed's history. Her chairmanship marks her fourth tour of duty on the Federal Open Market Committee, the body that makes the Fed's all-important monetary policy decisions. In her significant experience, we have seen a central banker who has navigated the uncertainty of a changed world.
Her experience has also demonstrated how refreshingly free of dogma she is in her approach to her many duties. In the depths of the Great Recession, Yellen joined with most of her colleagues in seeking to support a collapsing economy against the risk of deflation, despite sustained criticisms from those who saw the Fed's policies as likely to unleash an inflationary tsunami (one that, nine years later, has yet to materialize). But she has also launched a return to monetary normalcy against critiques from other corners that the economy cannot bear the monetary tightening. Whether she is right or wrong on these decisions is yet to be determined. What is important, though, is that Yellen is one of the least dogmatic central bankers in the Fed's history, open to persuasion as the facts change. In fact, while some Republicans view Yellen as too soft on inflation, her anti-inflationary record is better than Volcker's.
Finally, no one understands the Fed's internal complexity better than Yellen, who has made committee governance the hallmark of her tenure as chair. Unlike some of her predecessors, Yellen views monetary policymaking as a collaborative activity, not something she can dictate by fiat. This kind of shared governance is not only required by statute, but it is also good policy. Yellen has consistently embraced the importance of the Fed's governance structure, a leadership decision that increases accountability and decreases the likelihood of error.
Central bankers and their critics often speak of the importance of Fed independence. Whatever else this nebulous concept means, it stands for the idea that central banks work best when monetary policy is not made with an eye toward serving the short-term electoral interests of the president. By this standard, Yellen is one of the most independent of central bankers.
Republicans and Democrats alike should encourage this opportunity for the president to lead in the tradition of Eisenhower and Reagan. In this era of hyperpartisanship, the Fed has succeeded in maintaining some necessary distance. Yellen's reappointment would continue this important tradition.