Which Kevin Hassett would lead the Federal Reserve?

On paper, Kevin Hassett looks like a conventional pick. He has a phd in economics, several top-tier publications to his name, decades in Washington and even a previous stint at the Federal Reserve. But if President Donald Trump does choose Mr Hassett as the central bank’s chair, an event to which prediction markets assign a more than 70% chance, his appointment would mark an abrupt shift in the relationship between the Fed and White House.

Before working with Mr Trump at the Council of Economic Advisers (CEA) in his first term and the National Economic Council in his second, Mr Hassett spent decades as a policy economist at the American Enterprise Institute, a think-tank, advising Republican luminaries such as George W. Bush, John McCain and Mitt Romney. He was best known for a book published on the eve of the dotcom crash, which predicted that stock prices would quadruple. The Mr Hassett of yore might have been an odd choice for the Fed—his expertise was in tax, not monetary policy—but far from a disastrous one.

Since then, however, Mr Hassett has undergone a transformation. CEA chairs tend to be bookish types who avoid muddying themselves with politics. Not Mr Hassett. He pushed out tenuous analysis to bolster the president’s agenda. His estimate of the boost to household incomes from the corporate-tax cuts of 2017 was well above the mainstream consensus. During the early weeks of the covid-19 pandemic he released a “cubic model”—the sort that can be generated with a few clicks on Excel—which projected that the disease would shortly subside. Recently Mr Hassett has become a reliable defender of tariffs and deficit-busting tax cuts.

Fed chairs often have partisan ties. Jerome Powell, the current one, is a Republican; Janet Yellen, his predecessor, ran President Bill Clinton’s CEA. But the last chair with a truly close relationship with the president was Arthur Burns, appointed by Richard Nixon in 1970. Under pressure from the White House Mr Burns cut interest rates, helping to cause a fearsome surge in inflation that took more than a decade, and several recessions, to tame. Thomas Drechsel of the University of Maryland estimates that raising political pressure on the Fed by half as much as Nixon did, for six months, would lift prices by 8% and do nothing for economic growth.

Mr Hassett has said that “monetary policy needs to be fully independent of political influence”; bond and currency markets have reacted calmly to news that he is the front-runner. And he might prove to be a surprise. Many a Supreme Court justice has grown more independent once in place, disappointing the party that nominated them. William McChesney Martin junior, Fed chair for nearly 20 years before Mr Burns, worked in President Harry Truman’s Treasury, only to frustrate both Truman and later presidents. Mr Burns’s chairmanship remains notorious today.

But Mr Hassett has also said that “the American people could expect President Trump to pick somebody who’s going to help them…have cheaper car loans and easier access to mortgages.” The question is how much sway he would have. Although he would push for interest-rate cuts, Federal Reserve chairs are not all-powerful; bringing down rates significantly would need the support of his fellow governors, which is unlikely to be forthcoming. Expect, at the very least, the unanimity of Mr Powell’s Fed to disappear and the central bank to end up with the sort of vote-counting seen at the Supreme Court.

The real risk would be if Mr Trump succeeds in his bid to fire Lisa Cook, another Fed governor, whom he has accused of mortgage fraud (which she denies). The Supreme Court is due to hear arguments in January. In previous cases involving the Fed it has shown a keen awareness of the institution’s independence, as when it carved out the central bank from a decision to allow the president to fire officials at independent agencies more easily. But if the court rules in Mr Trump’s favour, he could stack the Fed with stooges. In which case Mr Hassett would lead a soiled institution—an appropriate, if miserable, end to an increasingly partisan career. ■