Bankshot

Herman Cain buzz signals shift in Trump’s Fed strategy

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WASHINGTON — Observers were caught by surprise by the news Thursday that President Trump is reportedly considering former 2012 Republican presidential candidate and fast-food business executive Herman Cain for one of the two vacant seats on the Federal Reserve Board.

Cain is known for his "9-9-9" tax policy that would have instituted a 9% federal sales tax and reduced existing income and business taxes to 9%. He is also remembered for the abrupt end of his campaign in 2011 amid allegations of sexual misconduct.

If Cain is nominated to a Fed post, it would be starkly out of step with Trump’s other nominations to the board. It is unclear what impact Cain could have on the Fed, but his appointment would signal a drastic change in the president’s attitude toward the central bank and its culture.

Upon taking office, Trump had two vacancies on the Fed board, including one for the key post of vice chairman for supervision. But within just over a year, then-Fed Chair Janet Yellen, then-Vice Chairman Stanley Fischer and then-Gov. Daniel Tarullo had all departed, giving Trump the opportunity to install a working majority on the board and a sizable bloc on the Federal Open Market Committee.

His picks to fill those openings, however, have been relatively noncontroversial. Jerome Powell, Trump’s pick to chair the Fed board, has been stringently independent since taking office, resisting repeated pressure from the White House on the Fed’s interest rate trajectory. Powell’s Senate confirmation as chairman — as well as the confirmations of Vice Chairman for Supervision Randal Quarles, former Kansas Banking Commissioner Michele Bowman and the Pimco economist Richard Clarida — were all broadly bipartisan.

Two other nominees — Carnegie Mellon economist Marvin Goodfriend and former Fed official Nellie Liang — languished in the Senate, with Goodfriend’s nomination held up by opposition from Democrats and Sen. Rand Paul, R-Ky., and Liang’s reportedly held up by Republican opposition before she withdrew her name from consideration last month.

Each of the prior nominees has been professionally qualified — gaining attention for careers in the banking industry, academia or the government — but relatively unknown in the political environment.

Cain is different. He is best known for having mounted a conservative political campaign. He has also been fiercely loyal to Trump.

That is not to say Cain is unqualified for a role at the central bank. Cain served on the board of the Federal Reserve Bank of Kansas City in the '90s, including a stint as chairman, so he is familiar with the system. Cain has also voiced pointed opinions on monetary policy questions, calling for a return to the gold standard and establishment of a rules-based monetary policy in a 2012 op-ed.

But that experience may not be the reason the administration is considering him for a Fed seat. Cain has been an outspoken Trump supporter from early in the president’s 2016 campaign, though he never formally endorsed Trump. After Trump’s sweep in the Republican primaries on Super Tuesday in March 2016, Cain told the GOP establishment to “get over it” and embrace Trump. Cain also defended the president during a campaign rally as “not a racist” and more recently established a Super PAC to aid in the president’s 2020 re-election bid.

Further, Trump’s oft-repeated preference for the Fed to maintain lower interest rates would seem at odds with Cain’s apparent preference for a rules-based monetary policy and a return to the gold standard.

The Fed’s monetary policy is guided by a dual mandate — low unemployment and price stability. Monetary policy rules tend to be favored by so-called inflation hawks or savers — people who would prefer that interest rates remain high rather than have unemployment remain low. And much of the appeal of a gold standard for U.S. currency is that it limits the Fed’s ability to manipulate interest rates — something fundamentally incompatible with the kind of accommodative monetary policy that Trump apparently wants to maintain.

That kind of ideological difference of opinion has apparently scuttled other Fed nominations. Goodfriend, a notable inflation hawk, has not been renominated by Trump since the new Congress began in January, and may not be for precisely this reason.

One can only suppose that Trump has been able to look past these differences of opinion because either Cain’s past views no longer represent his current ones, Trump no longer cares about the direction of federal interest rates, or because Trump views Cain as someone who can follow the guidance of the administration — in contrast to Powell's independence.

There is reason to believe that Cain's views on monetary policy have shifted. In an interview Friday morning on Fox Business, Cain said that "deflation ... is more of a fear factor than inflation." Central banks increase interest rates to combat inflation and lower interest rates to combat deflation, so it is reasonable to assume that Cain favors lower interest rates, at least for now.

But if Cain is nominated and confirmed, little will change at the Fed. A single board seat amounts to a single vote on regulatory or supervisory decisions and an even more diluted vote on the Federal Open Market Committee, which includes both the Board of Governors and the heads of regional Fed banks.

The FOMC is a deliberative body, and though it holds a multitude of differing opinions and perspectives, it tends toward consensus — particularly on shorter-term interest rate questions. The FOMC’s announcement earlier this week that the practice of paying interest on excess reserves for Fed member banks is a primary tool of enacting monetary policy, is an indicator that there is a limited market for outsider monetary policy ideas like returning to the corridor system or the gold standard.

But things can change, and they can change quickly. One thing that Cain’s nomination clearly indicates is that the president is not satisfied with considering only moderate Fed voices. If there are a wave of new vacancies on the board, Trump could conceivably replace today’s moderate members with others who, like Cain, are fundamentally loyal to the president. That is especially true if Trump wins re-election in 2020.

That opportunity could come sooner than we think. Bowman’s term as governor expires in January 2020; Clarida’s expires in January 2022. And although Powell’s term as governor does not expire until 2028, his term as chair expires in 2022 — unless Trump attempts to remove him sooner.

If Trump gets the opportunity to choose a new Fed chair, the attention Cain is receiving as a potential governor opens up the possibility that a similar candidate — maybe even Cain himself — could be looked at to run the central bank.

Cain has not yet been nominated, and he may not be. He may view the Fed’s independence as sacrosanct the way most every other person in a leadership position in the Fed system does. But Trump appears to want greater control over the Fed than he has had to date, and Cain’s nomination could offer him a path to get it.

Bankshot is American Banker’s column for real-time analysis of today's news.

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