The Fed Isn’t the Tax Cut’s Enemy

Officials are open to the possibility that the tax cut will raise the economy’s potential growth rate, although it isn’t their base case

conventional wisdom is that this is the wrong time for Republicans to cut taxes by $1.4 trillion over the next decade. The fiscal stimulus will overheat the economy and force the Federal Reserve to slow it down by raising interest rates more aggressively.

inflation is still too low, and that completely changes the equation: It suggests overheating is to be welcomed, not resisted.

officials are open to the possibility that the tax cut will raise the economy’s potential growth rate, which means faster growth wouldn’t necessarily lead to more inflation.

.. Ms. Yellen and her likely successor, Fed governor Jerome Powell, aren’t yet the party poopers many supply-side tax cut advocates feared.

.. [Larry Kudlow: ] The real test, he said, is how the Fed reacts if growth tops 3%

.. By 2020 Fed officials expect their benchmark federal-funds rate to reach 3.1%, which would be above the 2.8% they expect to prevail in a fully-employed economy growing normally

.. Ms. Yellen made it clear she didn’t agree with Mr. Trump and Treasury Secretary Steven Mnuchin that the tax cut would pay for itself, and warned it may be “taking what is already a significant [debt] problem and making it worse.”

Who Will Be Trump’s Pick to Lead the Fed? We Asked Experts to Rate the Odds

Ms. Yellen has a possibility of being renominated, according to this consensus, but it is only 22 percent; experts think that Kevin Warsh, a former Fed governor with deep Republican ties, has a slightly better chance at 23 percent.

.. The case for renominating Ms. Yellen is straightforward.

She has presided over four years of steady economic expansion and rising financial markets. She moved cautiously toward raising interest rates even though the economy seemed to be approaching full employment. By contrast, some more conservative contenders for the job have indicated they want to raise rates more quickly, which could endanger the economy as President Trump approaches midterm elections in 2018 and a potential re-election battle in 2020.

.. Moreover, as President Trump dabbles in making deals with Democrats, reappointing Ms. Yellen could serve as an expression of good faith to Democratic senators. As administration officials focus on tax legislation and other priorities on Capitol Hill, it might be helpful to them to nominate someone who might sail through confirmation, rather than demand a bruising, time-consuming battle.

.. The case against Ms. Yellen is similarly straightforward: She is a liberal economist in a government dominated by conservatives. She is a cerebral academic serving during the presidency of a bombastic businessman. And she is a staunch defender of the work the Fed and other bank regulators have done to try to limit risk in the financial system — including in a high-profile speech last month — amid an administration focused on deregulation.

Kevin Warsh: well connected, but with baggage

He has a law degree, but no advanced degree in economics.

.. Mr. Warsh has been a skeptic of the Fed’s efforts to boost the economy through quantitative easing and has advocated raising interest rates more quickly. He also has a regulatory philosophy more in line with the administration’s.

.. Mr. Warsh’s father-in-law is Ronald Lauder, of the Estée Lauder cosmetics fortune, a major Republican donor with longstanding ties to Mr. Trump.

.. If Mr. Warsh is nominated, expect significant blowback during the confirmation process from Democrats, who are likely to accuse the 47-year-old Mr. Warsh of being underqualified, of being responsible for the 2008 bank bailouts and inclined to regulate banks too lightly now, and of being too overtly political for the traditionally nonpartisan Fed chairmanship.

.. Democrats would be eager to criticize the administration for naming a recent top executive at Goldman Sachs to be the nation’s most powerful financial regulator. Some populist Republicans might join them.
.. Foremost among them are several of the names we would probably be hearing about if a conventional Republican president were in the White House
.. John B. Taylor is a respected economist at Stanford who worked in the George W. Bush administration and has been an influential voice among congressional Republicans who want to see the Fed bound by stricter rules governing its actions.

Glenn Hubbard was a top economic adviser to Mr. Bush who is dean of Columbia Business School.

Larry Lindsey was another top adviser to Mr. Bush and a former Fed governor with an economics doctorate from Harvard.

.. Their doctorates and affiliations with top universities may actually be downsides in an administration that has shown disdain for academic expertise.

.. other names has emerged in various reports, including the F.D.I.C. vice chairman Thomas Hoenig and John Allison

Why Soaring Assets and Low Unemployment Mean It’s Time to Start Worrying

Today’s conditions expose vulnerabilities that make a recession or market meltdown more likely

 If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.In other words, it would look a lot like the present.

.. Companies meanwhile have responded to slow, stable growth and low rates by borrowing heavily, often to buy back stock or pay dividends. Corporate debt as a share of economic output is at levels last seen just before the past two recessions.

.. Last week Janet Yellen, the Fed chairwoman, said she thought there wouldn’t be another financial crisis “in our lifetimes.” Fair enough: crises as catastrophic as the last happen twice a century. But small crises are inevitable as risk migrates to financial players who haven’t drawn the attention of regulators.

..  in a world with permanently lower inflation and growth, businesses will struggle to earn their way out of debt

Beneath the Uneasy Peace Between Donald Trump and Janet Yellen

The president’s relationship with the Federal Reserve has so far been cordial, but that doesn’t mean Chairwoman Janet Yellen is likely to stay on

.. Their placid relationship reflects Mr. Cohn’s leading role. Ms. Yellen meets regularly with Mr. Cohn and Treasury Secretary Steven Mnuchin, who also spent much of his career at Goldman Sachs.

.. Mr. Cohn takes pride in convincing Mr. Trump of the economic benefits of respecting the Fed’s independence, including by not firing off verbal or Twitter attacks on the central bank, according to people who have discussed the issue with him.

.. Many Wall Street and Washington observers expect Mr. Trump to select his own candidate for the top job, possibly Mr. Cohn.

.. These concerns haven’t been aired publicly by the administration, in contrast to Mr. Trump’s comments during last year’s election, when he said Ms. Yellen should be “ashamed of herself” for keeping rates low.