Larry Kudlow explains in a column posted at RealClearPolitics.com why the identity of the next Federal Reserve chair is less important than the policy that person will follow once appointed.
Markets think [Janet] Yellen will be an easy-money dove and that [Larry] Summers would have been the tight-money hawk.
But stocks have no way of knowing this, because neither Yellen nor Summers have suggested a rules-based monetary policy that will prevent serious financial crises while stabilizing inflation and maximizing growth.
In the 1980s and 1990s, a rules-based monetary strategy worked very well. Economists have called the period the Great Moderation. Yet as bright as they are, Yellen and Summers are big government and big Fed fine-tuners, meddlers and tinkerers. And that’s exactly what we don’t need from the next Fed chair.
Instead, we need a rules-based approach that will guide the Fed through the difficult period of shrinking a $3.7 trillion balance sheet and a $2.2 trillion volume of excess bank reserves, and raising the zero interest rate. …
… For most of American history, a reliable “King Dollar” and sensitive commodity prices, including gold, have been important market-price signals to guide Fed policy. (More often than not, Ben Bernanke ignored these signals.) And we can now add to that the “market monetarists,” a new group that advocates nominal-GDP targeting, which is a combination of inflation and real growth and is somewhat akin to the Taylor Rule.
The key point here is that the next Fed chair should employ consistent targets rather than big-Fed tinkering. Ironically, Yellen, the supposed dove, has talked about the usefulness of a modified Taylor Rule. And equally ironic, Larry Summers has written that independent central banks have the best low-inflation track records. Yet Summers was clearly too political to get the job, and Yellen’s dovish feathers follow her everywhere.
