The best thing Trump could do for the economy

The best thing President Donald Trump could do for the economy certainly isn’t tax cuts. It’s not getting rid of the Affordable Care Act. It’s not even his infrastructure plan.

It’s the reappointment of Federal Reserve Chair Janet Yellen for another term.

Yellen’s four-year term expires in February 2018, and she’s clearly in the running for reappointment. There are others on the list, but none have Yellen’s experience, her track record or her commitment to full employment and growth.

Moreover, we’re deep into an economic expansion with low unemployment, strong job growth, stable markets and no obvious signs of bubbles. If ever there was a steady-as-she-goes/ don’t-change-horses-in-the-middle-of-a-stream moment, this is it.

Those adages are particularly germane given that the Fed is coming out of a period marked by two unprecedented actions, both of which were intended to help offset the massive demand contraction known as the Great Recession.

First, from 2008 (before Yellen was chair) until 2015, the Fed held the benchmark, short-term interest rate at zero. Second, in an effort to put downward pressure on longer-term interest rates, the Fed spent trillions on longer-term assets in its “quantitative easing” (QE) plan.

It has since been engaged in a “normalization” campaign, slowly raising rates and winding back QE by very gradually reducing their debt holdings. Anyone who follows the Fed knows that these moves are controversial and intensely watched by markets. Given the lack of inflationary pressures, I have cautioned against rate increases, while others have critiqued the Fed from the other direction, arguing for it to quickly normalize rates and get out the bond market.

But I am not going to litigate that argument. I want to point out that Yellen is deeply embedded in the process of carefully and successfully managing this ongoing campaign. By “successfully,” I mean that at this delicate moment in the history of monetary policy, she’s providing markets here and abroad with the information they need to understand the Fed’s actions. In doing so, she thoroughly eschews former Fed chair Alan Greenspan’s intentional opacity, and builds further on her predecessor Ben Bernanke’s principle of “forward guidance.”

Next, more so than some of the other front-runners for the job, Yellen is pro-growth, which should appeal to Trump, who has himself made this observation about her. Like normalization, this issue of balancing growth and inflation — the Fed’s dual mandate — stands at a sensitive moment. The model the Fed uses as a guidepost in the trade-off between inflation and unemployment is broken. Historically, falling unemployment had been correlated with faster inflation, but lately, as the jobless rate hits new lows, inflation is, if anything, growing more slowly.

One area where Yellen has directly contradicted Trump is regarding the Fed’s role in regulating the banking system. She has underscored the importance of measures, such as the DoddFrank financial reform, intended to avoid bubbles and financial busts, while Trump has called for repealing them.

But Trump should consider the growth implications of his position. If you take down the guardrails, the next time a bubble inflates, you’re inviting one of two outcomes. Either you get a recession when the bubble bursts, or, to offset the impact of the bubble, the Fed will need to jack up rates, slamming on the growth brakes. In fact, Yellen has argued that the purpose of ample oversight is to avoid punishing millions of average households with slower growth and higher unemployment because the under-regulated banking sector again systematically underprices risk.

Finally, by reappointing a woman — and Yellen is the only woman under consideration for the job — Trump sends an important message about gender balance in a highly male-dominated sector.

Like most economists, I don’t believe in free lunches. But for all these reasons, I’m convinced that reappointing Janet Yellen is all upside for the president and, even more important, for the rest of us.