President Trump is set to name his nomination to lead the Federal Reserve Bank maybe as soon as this week. The three front-runners are: the current head of the Fed Janet Yellen, Stanford University Economics Professor John Taylor, and current Fed Board Member and ex-investment banker, Jerome Powell.
While Trump railed against Yellen on the campaign trail, her actual track record has been mostly positive for the economy and the market. She was a part of the Fed while they grappled with the depths of the Financial Crisis and led the fiscal policy during much of the recovery. Her support of both stricter banking regulations and policies to keep interest rates low have balanced each other out -- putting additional restraints on the system while feeding the economy enough adrenalin to bring back growth. She has been a steady hand in a turbulent time.
The two men who may replace her could represent a change in general philosophy of the Fed. They both are more hawkish in terms of their view of fiscal policy, and take a more laissez-faire view on regulations.
The more known commodity is Jerome Powell who has been a part of the Federal since 2012. His nomination may not cause much market turmoil as this would not be a huge departure from the incumbent leadership. While his centrist philosophy is not as dovish as Yellen, he has generally voted in line with the consensus and his time at the Fed has probably given him the experience to ably lead. One area of departure is Powell’s focus on size of the Fed balance sheet. Bernanke, in his memoir, has sited Powell as a supporter of the easing of Fed bond purchases in August of 2014 leading to the bond sell off known as the Taper Tantrum.
John Taylor, a disciple of Milton Freidman (and not the Duran Duran bassist), has a body of work including his blog writing and his 2015 book First principles: five keys to restoring America's prosperity, which emphasizes reliance on free markets and a limited role for government. Taylor lobbies for “rules-based” decision-making for the Fed. He favors Fiscal responses versus a Keynesian Monetary policy of government intervention through spending. While his rules-based steering could give clarity for how the Fed will act under certain situations, it may cause some additional volatility when faced with extraordinary, uncharted times. The Taylor Rule, which he developed to guide the Fed on where they should set the discount rate, currently would put rates at about 3% according to the Federal Reserve Bank of Atlanta’s calculation. This is significantly higher than the current 1.00% to 1.25% rate. In these unusual times, rules-based solutions may not be as effective as a more thoughtful, nuanced, and creative approach.
Trump certainly wants to put his mark on the Federal Reserve, in part to deflect some of the market’s rally from the current Fed leadership, placed by Obama. Although, if Trump is going to use the stock market as a yardstick for his own effectiveness, his best bet may be to keep the Yellen in her position as her supportive policies have been a boon to the market. While putting a hawkish Republican in the role would excite his base, Trump should be wary of the possible market reaction of a Fed more eager to raise rates and shrink the balance sheet. Powell’s centralist tendencies and his experience are some of the reasons why he is the odds-on favorite for the nomination
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