The Trouble with Taylor

Taylor has emerged as a leading contender for Fed chair. His eponymous Rule has the funds rate at 3.74%, but in practice he would have as little chance of imposing that on the FOMC as Bernanke had of imposing his pet idea of “inflation targeting.” The real risk is that, in a systemic event, he would cling to his Rule in a doctrinaire way that would prevent a necessary crisis response. Fundamentally he is a Fed insider, with his Rule embedding the Fed’s deepest superstition: the Phillips Curve. The only true reformer being considered is Warsh, who has been subjected to a brutal smear campaign, but is still in the running, and our favorite. Powell is the market’s favorite now, and that would be a safe choice for Trump. But Trump makes unsafe choices, and Warsh the reformed is the only candidate who offers any real economic upside.