Did Trump Just Start the Next Recession?

Almost all Fed chairs have been economists. But the chair named by President Donald Trump isn’t an economist — and that could be disastrous for our economy.

I’m a stickler for going to the right guys to get the job done.

I go to the dentist to get my teeth cleaned.

When my kids are sick, I rush them to a qualified doctor.

If I want my taxes done, I go to an accountant.

I think you get the point.

They’re professionals for a reason, and they do that job every day.

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I wouldn’t take my kids to the insurance rep down the street asking him to diagnose their illness.

It doesn’t make sense.

And when it comes to arguably the second most important position in our economy — the Federal Reserve chair — you would think it would be a good idea to stick to that theme.

Almost all Fed chairs have been economists.

But the next named chairman of the Fed isn’t an economist — and that could be disastrous for our economy.

A Curveball for Policy

Last week, President Donald Trump nominated Jerome Powell as the next Fed chairman.

He would replace Janet Yellen, who has been head of the Fed since 2014.

Powell was appointed to the board of the Fed in 2012 by President Barack Obama, so this isn’t a political issue with the appointment, nor should it be.

The Fed is supposed to be an independent institution, operating outside of the political parties in the government and focusing on its dual mandate: maximum employment and stable prices.

Many Fed watchers see this nomination as continuing the road map Yellen laid out, meaning that we should see gradual and planned rate increases going forward.

But Powell could also be a curveball for policy.

He wouldn’t be your typical Fed chair — his background isn’t in economics.

In fact, he would be the first noneconomist Fed chair since the 1970s — and that may be a history lesson we want to avoid repeating, as I’ll explain in a moment.

Trump Has Named His Man

Powell’s background is in law.

He has a bachelor’s degree in politics, as well as a law degree. He has worked at investment banks, and as undersecretary for finance in the Treasury Department. And his most recent stint was as a voting member of the Federal Reserve since 2012.

For comparison, Yellen was a professor in macroeconomics, chair of the Council of Economic Advisers, president of the Federal Reserve Bank of San Francisco and vice chair of the Federal Reserve Board.

You can see that Yellen has a background in studying the ways the Fed impacts the economy over her entire career.

Powell has been on the Fed board since 2012 and hasn’t once voted against the majority position. This may mean he has just followed the herd, so we haven’t seen how he really thinks yet.

Keep in mind, Yellen did nothing to lose her job as Fed chair and now will have served the shortest time as Fed chair since the last noneconomist, who served in 1978.

This could be a sour spot for the Trump presidency because Fed policy can be a scapegoat for economic turmoil, blaming low rates and easy-money policies. But now that Trump has named his man for the spot, the blame will shift back to Trump instead of the Fed.

But maybe that is Trump’s goal with the move — a little more control over the Fed through Powell.

Periods of Stagflation

So, who was the last noneconomist to run the Fed?

Well, many would put him in the history books as the “least respected chairman in the Fed’s history.”

Here’s what happened.

In 1978, G. William Miller, the last noneconomist to run the Fed, took control of the central bank amidst an economy that had high inflation (or rapidly rising prices) in part due to rising oil prices.

He believed this inflation would self-correct because oil prices fluctuate and continued to maintain an easy-money policy.

The effects sent the U.S. dollar plunging as inflation continued.

It marks one of the few historical periods of stagflation, which means the economy was stagnant, yet inflation, or prices, was rising rapidly.

After just one year, he was out as the Fed chair. But his successor, Paul Volcker, had to use abrupt policy measures to tame inflation, and this resulted in a recession from 1980 to 1982.

So the last noneconomist to run the Fed largely takes the blame for running the economy into a recession.

We are in quite different times now, with an economy that is recovering and inflation that has remained stuck below the Fed’s mandate of 2%.

But things can change.

The question is, will Powell know when to adjust monetary policy? Or will he be pressured to let policy remain easy for longer to pursue a stronger economy?

Let’s hope he relies on the many economists who are members of the Federal Reserve. They should help him keep the Fed’s gradual and measured management style and avoid stagflation.

Regards,

Chad Shoop, CMT
Editor, Automatic Profits Alert

  • Noel Cookman

    You are kidding, right? All economic disasters were the result of economists’ prescriptions being followed by the government. Karl Marx was an economist. Would he have qualified to head the Fed? Keynes was an economist. Please don’t tell me that his ideas lifted America out of the Great Depression…I’d have to yank your credibility card. Does Greenspan’s easy money policies suit you just fine? Were you even alive in 2008? Good grief.

  • Gordon

    Describing economists as professionals is an insult to the professions. There is an old saying, attributed to Yogi Berra, that goes, “In theory, theory and practice are the same, but in practice they are not.” Economists seem not to appreciate this truth, and when practice doesn’t conform to their theories, they figure that there must be something wrong with practice, because their theories are accepted by all modern main-stream economists.
    I have no idea how Jay Powell will work out as Fed chair. Probably not well, but that is more likely to be a consequence of all the cumulative errors coming home to roost on his watch, than with any errors or changes he may make.

  • Paul.Lemikos

    Okay. So why aren’t cryptocurrencies run by people who know “when to adjust monetary policy”? Yikes! I thought Banyan Hill was more in tune with Austrian Economics. Guess not. The only thing Trump can do to help us hoi polloi is to veto any budget which does not reduce the size, scope, breadth of Leviathan.

  • Richard Keech

    If Trump is not stopped, he will turn the country into a fascist dictatorship run for the benefit of his billionaire cronies and supporters.

  • Richard Keech

    I’d still rather have the Fed run by a widely-known and respected Ph.D. economist.

  • Thomas Waldenfels

    Respected by whom?

  • Thomas Waldenfels

    I don’t want to waste my time. Are you boyz censoring, because you can’t stand pointed critiscism, or is your system acting up? Hey, it’s your site and you can post or not post anything you like, but you INVITE comments, and I think you should have the decency to either post them or give a reason why you won’t.

  • Thomas Waldenfels

    You really have to be kiidding. This presumes three things … all of which are nonsense.

    1) That the economists at the Fed … Greenspan, Bernanke, and Yellen, first and foremost … have done a swell job of managing monetary policy. Nothing could be further from the truth. Their policies have been and continue to be disastrous and we’ve yet to see anything more than a little preview of the likely consequences. These people are clueless, relying on worthless “dynamic stochastic general equilibrium” models and constructs such as the Phillips curve, which have proven to be of no predictive value. They get EVERYTHING WRONG. They’re also nothing more than tools of the deep state. They don’t make independent decisions. Anyone who believes they do is dreaming. They brought us low rates and a gusher of newly conjured phunny munny, because that’s what their bankster owners and
    their government co-conspirators wanted and needed. The idea that the Fed is run by disinterested economic experts who know what to do to maximize economic output and ensure full employment while keeping prices stable is ludicrous … belied by the facts of history. You can’t possibly be an analyst and believe that yourself.

    2) Just because Powell is a lawyer and comes from the hedge fund world, doesn’t mean he’s any less qualified than the economists. Economists are intelligent fools for the most part. At least our new puppet will have had some real life experience managing big money. That said, he’ll just do what he’s told like the rest. While who the chairman is matters very little. It’s the evil, criminal institution itself that deserves scrutiny and criticism, not the
    flunkies who populate or chair the FOMC.

    3) You attribute Bill Miller’s failure to his not being an economist. How about his not possessing a
    spine? I think that probably explains things a bit better. When Johnson literally pinned him to the wall of the Oval Office and threatened him, he should have gone directly to law enforcement and the press and broadcast what
    happened. At any rate, saying Powell is dangerous because he, like Miller, isn’t an economist is laughable. We have a syllogism here. You’re saying Jay Powell is not an economist … and ALL non-economists are incapable of chairing
    the Fed or at least they’re dangerous Therefore, Jay Powell is incapable of chairing the Fed or is, at least, dangerous. You need to re-take that class in deductive logic. This is especially silly given that the economists understanding of economics is flawed, based as it is on loony Keynesian theory.

    This has to be the most offbase article I’ve read from you people other than Mampilly’s championing the idea of being
    “chipped.” But it’s a pretty close second.

  • Noel Cookman

    Exactly. Well said. These boys just talked me out of listening to any financial or economic advice. Their political ideology has produced some cognitive bias…the deal knell in investing and business achievement.

  • Noel Cookman

    Amongst most millennials, no economist is more respected than Karl Marx. Moreover, they’re as likely to be stupid enough to think he would be available to run the Fed.