The Washington PostDemocracy Dies in Darkness

Trump made a good Fed pick. But Yellen would have been better.

Jerome Powell, Federal Reserve governor and Trump's nominee for Federal Reserve chair. (Andrew Harrer/Bloomberg)
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If it's possible to make a good decision that also makes no sense, President Trump has just done that.

Jerome Powell, Trump's choice to be the next Federal Reserve Chair, is a perfectly defensible pick. He's worked on Wall Street, in the Treasury Department and, most recently, as a Fed governor, where he's been on the right side of just about every economic debate the past five years. What's indefensible, though, is not simply reappointing Janet L. Yellen to the job. She couldn't have been better at it. Unemployment, after all, is at a 16-year low of 4.2 percent, and inflation is still quiescent at just 1.6 percent. Those are fantasy numbers for a central banker. Although perhaps we shouldn't be surprised that someone with Yellen's background has done so well. She has a PhD in economics from Yale, was the head of President Clinton's Council of Economic Advisers, a Fed governor, a regional Fed president, the Fed vice-chair, and finally the Fed chair itself.

But now she's going to be out of a job.

To put in perspective how crazy it is that someone with Yellen's track record isn't being kept on, take a look at the chart below. It shows what's known as a central banking “loss function,” basically how far the Fed is from achieving its stated goals of low unemployment and low inflation. (This is a simple one that weighs both equally, although recent research has suggested that central banks should maybe put more emphasis on unemployment). The closer it is to zero, the better the Fed is doing.

As you can see, the Fed has had its best performance under Yellen. Indeed, it has averaged a mere 0.9 “loss” during her tenure, compared to 1.4 for the runner-up in Greenspan. And the only reason her numbers aren't even better is that, according to this model, unemployment and inflation are both a little too low right now. That's a bit of a paradox, since lower unemployment is supposed to cause higher inflation, but it gives you an idea of the kind of nitpicking you have to do with Yellen. Things almost seem too good by traditional measures.

This isn't the whole story, though. Take Paul Volcker. It's not his fault that he inherited a high-inflation economy that makes his numbers look worse than everybody else's. Especially not when he ended up making things much, much better by the time he left the Fed. What you have to do, then, is also look at how much the Fed's “loss” changed over the course of a Fed chair's term. Although even that can be misleading if, say, a bubble built up during someone's time at the helm — let's call him “Alan Greenspan” — and only burst after he left. In any case, though, this measure says that Volcker was the most successful Fed chair of recent vintage, and Yellen maybe the second or third most (with Ben Bernanke sharing the credit for the recovery). Sure, she was bequeathed a pretty healthy economy, but it's gotten even more so under her direction and shows no signs of stopping. There isn't much more she could have done.

This really is an unprecedented situation. There's been an unofficial bipartisan tradition to reappoint a Fed chair as long as they're doing a good job and want to keep doing it. Reagan kept Carter-nominee Volcker, Clinton kept Reagan-nominee Greenspan, and Obama kept Bush-nominee Bernanke. Trump, though, apparently felt, as he put it, that “you want to make your own mark.” In other words, Yellen was Obama's pick, so she couldn't be Trump's no matter how perfectly she did her job.

None of this is to say that Powell isn't a solid choice himself. He is. In fact, he might be the second-best person for the job.

But what happened to only hiring the best?