The Fed's Job is About to Become Much Harder

With Janet Yellen’s term ending in February, President Trump will have to nominate, and the Senate confirm, a new Fed chair in coming months. There will be much discussion of the merits and implications of various candidates for the job. But it will be important for the president and senators to begin by considering the challenges the next chair will face.

While I would have preferred slower increases in interest rates at key junctures, and believe that the Fed has consistently over-assessed future inflation, growth and monetary tightening, and is too serene about the current robustness of the financial system, the Fed has done very well overall in recent years. We have not enjoyed so favorable a combination of low unemployment and inflation in decades. Markets have been remarkably stable — perhaps even too stable — for years. And the Fed, by the standards of other Washington institutions and central banks around the world, is highly respected. This all is both a tribute to its leadership and a reflection of fortunate circumstance.

I suspect the Fed’s job will become much more difficult over the next few years, however. Economics, finance and politics are all likely to throw up new challenges demanding creative and unorthodox responses.