‘None are going to be major disrupters’, but Trump’s choice for next US Federal Reserve chair depends on interests
Stick with the current chair, an Obama appointee who has kept rates low and markets happy? Or switch to a Republican more favourable to a deregulation agenda?
President Donald Trump says he is “very, very close” to naming the next Federal Reserve chief, building suspense toward perhaps the most consequential decision he has left to make in 2017.
But the sweepstakes to pick the new Fed chair, likely to be decided before Trump departs for Asia in 10 days, finds the new president pulled in different directions.
Stick with the current chair, an Obama appointee who has kept rates low and markets happy? Or switch to a Republican more favourable to the Trump administration’s deregulation agenda?
For most presidents, giving Janet Yellen another four-year term would be the obvious move: unemployment is falling, inflation is low and, despite whipsawing hurricanes, the economy is growing. By any measure, Yellen has performed very well.
Furthermore, for the past 40 years or so, Fed chairs have been passed like batons between presidents, with the newest White House occupant reappointing the occupant of the powerful post inherited from his predecessor, if only for the sake of continuity and calm markets.
Trump has said he likes Yellen and interviewed her as a candidate. And in the post-crisis decade of easy money, Yellen has shown she will not rush to raise interest rates – something every president should like.
“If he’s going to make a change, we don’t favour it,” said Art Hogan of Wunderlich Securities.
“She’s certainly been a great communicator to markets.”
Still, betting markets currently expect Trump to pass over Yellen – making him the first president not to retain the incumbent Fed chair since Jimmy Carter dumped Arthur Burns in favour of G. William Miller while US inflation skyrocketed in 1978.
This would mean changing horses midstream, even though the economy is the one area of smooth sailing for an administration otherwise engulfed in turmoil.
Why? For starters, Yellen is both a Democrat and an Obama appointee, making her an enticing target for a president who has seemingly relished in dismantling his predecessor’s major decisions and policies.
Yellen is also a vocal defender of the wave of financial and banking regulation put in place after the 2008 meltdown – a position that runs counter to the Trump administration’s deregulation agenda.
Lastly, she is a favoured target of Republican lawmakers that Trump may need to govern and who believe interest rates should be higher but regulations reduced.
“Making a change may be seen as playing to his base, who think the Fed has stayed too low for too long,” said Hogan.
At a meeting with Senate Republicans on Tuesday, according to Bloomberg, Trump asked for a show of hands and one participant said most appeared to favour Stanford University economist John Taylor, who is known to favour higher interest rates.
Taylor is perhaps best known for having designed a mathematical equation, dubbed the Taylor rule and favoured by influential Texas Republican lawmaker Jeb Hensarling, that would compute and set interest rates based on inflation and growth data.
Another candidate, Kevin Warsh, is a former Fed governor, a proponent of higher interest rates and a son-in-law of Trump associate Ronald Lauder.
Trump told The Wall Street Journal in July he wanted “to see rates stay low”. But in Taylor’s or Warsh’s hands, monetary policy would now be considerably tighter.
Trump has also said he is considering current senior economic adviser Gary Cohn, a former Goldman Sachs president, but the White House may be reluctant to lose Cohn in the middle of hard-fought efforts to enact sweeping changes to the tax code.
The final known candidate is Jerome Powell, a former high-profile investor and the sole Republican currently sitting on the Federal Reserve Board.
Seen as a centrist, Powell has most often voted with most Fed policymakers and could emerge as a consensus candidate – not likely to push for higher rates too soon but more sympathetic to the financial industry’s views of regulation.
“Powell is probably more amenable to some modification of our regulatory regime,” said Edwin Truman of the Peterson Institute, noting that he considered Yellen a personal friend.
“None of them are going to be major disrupters.”
But according to Sarah Binder, a senior fellow at the Brookings Institution who studies political forces affecting the Fed, the subsequent question may be what pressure Trump attempts to exert on the Fed, which is legally independent.
“Put aside the question of the economic context. The thing we know about the president is that he prizes loyalty,” she said.
“We don’t know if he understands the fact the that Fed chair is not part of the Cabinet.”