Does the Fed chair need an economics background?
How important is it to have an economics background to run the Federal Reserve? The FT's US economics editor Sam Fleming talks to several leading economists on whether being versed in the theory is a basic requirement for a Fed chair.
Produced by Ben Marino. Filmed by Sam Fleming and Ben Marino. Edited by Donell Newkirk. Additional footage courtesty of Getty, Reuters, and Bloomberg.
Janet Yellen is heading into what may be her final six months at the helm of the Federal Reserve after just a single term as its chair. If Donald Trump declines to renew position, the decision may usher in a sharp change of approach at the top of the US central bank. Like her immediate predecessor, Ben Bernanke, Ms. Yellen is a PhD-bearing economist who came to the job with an international reputation in her field. Yet there's no requirement on the president to appoint a Federal Reserve chair person who's from the world of academic economics, and he could look to Wall Street instead. Among the possible candidates are Gary Cohn, a former Goldman Sachs banker, who now is head of the National Economic Council, Kevin Walsh, who's a former governor on the Federal Reserve Board, and Jay Powell, who's a current governor. None has a PhD in economics, and all steeped in the world of finance and banking. Sarah Binder of the Brookings Institution wonders how well a Fed chair without a deep economics background would fare.
And so certainly having some broader awareness and experience in markets and finance matters. I'm still of the view that the expertise that comes, hopefully would come, from a PhD in economics and exposure to debates and understanding of debates and having some view of a path forward, that that would be a stronger background. But of course, there are a lot of factors here when we're talking about President Trump and what exactly he's looking for. Expertise may not be top of the list.
Yet a look at the Fed's history suggests an economics background is no guarantee of success. The first senior academic economist to hold the post of chair was Arthur Burns, whose stint was a chequered one as he grappled with political pressure. By contrast, the longest serving Fed chair, William McChesney Martin, had a background in classics and stockbroking. He presided over a golden age economically, encompassing five administrations from Harry S. Truman to Richard M. Nixon, and helped cement the central bank's independence. William McChesney Martin reputedly had mixed views of economists. One former staffer recalls him saying he looked to them like a drunk looks to a lamppost, for support rather than illumination. Liaquat Ahamed, author of the Lords of Finance, a history of central banking around the time of the Great Depression, says it may even be a good thing for a Fed chair not to be an economist.
I would argue you don't need to be an economist. And some of the most successful Fed chairs, like William McChesney Martin, were not economists. Volcker didn't have a doctorate. I mean, he obviously had a masters, I think, in economics. And we've had some economists, like Burns, Arthur Burns, who took office in '71 and was there through the terrible '70s, who was a disaster. So it's neither necessary nor sufficient to be either an economist nor a non-economist.
The ideal Fed chair would bring a host of skills to the table. One example of this is Paul Volcker, who is not a PhD in economics, but who had practical experience, not only in the field of economics, but also banking and, crucially, the machinations of Washington politics. Nicolas Veron said it is very hard to find central bankers who tick every box.
So I think it's fine if you don't tick all the boxers. It's a matter of personality, of the ability to learn, of the ability to listen. But evidently, there have been successful central bankers that didn't tick all of those boxes.
Given the battered reputation of the economics profession in the wake of the crisis, the temptation for Mr. Trump to appoint someone who is from outside academia will be considerable, especially given the president's suspicion of wonks and experts. Speculation about the decision by this most unpredictable of presidents will hang over the markets for months to come. Sam Fleming, Financial Times, Washington, DC.