A Quick Guide to the Fed Chair Nominees
This week’s Monday Morning O’Malley highlighted the upcoming selection of the next Federal Reserve (Fed) chair. The top candidates for the nomination include Jerome Powell, John Taylor, Janet Yellen, Kevin Warsh, and Gary Cohn. The Chart of the Week shows recent betting odds on who will receive the nomination. While the odds are fun to talk about, this week’s write-up covers the candidates’ viewpoints and policy stances so the risks behind the candidates can be anticipated. Investors should be prepared for any outcome by understanding how each candidate would lead the Fed on key issues including monetary policy, the balance sheet, transparency, and regulation.
Jerome Powell is currently the frontrunner for the Fed chair nomination and has been a Fed governor since 2012. Based on his centrist view to Fed actions over the recent years, the consensus is that Powell would maintain the status quo. Rate hikes and balance sheet reduction would likely continue to progress according to the guidance provided by the current Fed leadership under Janet Yellen. Powell is also a proponent of the Fed’s approach since the Bernanke-era to maintain transparency in its communications to guide markets on policy actions. Powell is expected to maintain the Fed’s discretion-based (as opposed to rules-based) approach to raising or lowering the policy rate. With regulation, Powell has shown support for most post-crisis reforms but would look to simplify and recalibrate certain areas to promote efficiency and reduce ambiguity.
John Taylor – a Stanford economics professor and creator of the famous Taylor Rule – has emerged as the second most-likely candidate to be nominated. Owing to his eponymous rule, Taylor would likely take a more rules-based approach to monetary policy. Based on current levels of employment and inflation, he is expected to be the most hawkish (supportive of higher rates) candidate. If Taylor is selected it would signal a regime change at the Fed, which would increase market volatility due uncertainty around how the “new” Fed would operate.
Current Chairwoman Janet Yellen is a similar candidate to Powell with regard to her views and policy stances; however Powell is expected to be favored to Yellen due to political reasons. Like Powell, she would maintain status quo at the Fed.
Kevin Warsh is a former Fed governor who worked closely with Bernanke during the financial crisis. He is another candidate whose selection would signal a regime change and would likely increase market volatility. Since Warsh left the Fed, he has been critical of the Fed’s transparency and focus on short-term risks. He has also questioned the efficacy of the Fed’s quantitative easing (QE) programs and would look to reduce the Fed’s balance sheet to its pre-crisis size. Warsh is a proponent of tax-reform and deregulation and would seek to use both to achieve higher growth.
Gary Cohn is the current Director of the National Economic Council and chief economic advisor to the President. Like Warsh, Cohn believes higher growth is attainable through tax-reform and deregulation. In his current role, Cohn has expressed desire to keep the U.S. dollar competitive in the global economy, suggesting he would be dovish (supportive of lower rates) as Fed chair.
Understanding the candidates’ viewpoints and policy stances is the first step for investors to prepare for the upcoming Fed chair nomination. Investors should also be thinking about what outcomes markets are currently discounting, and how that discounting would change based on each outcome. For example, the Fed’s dot plot is projecting three rate hikes for next year while futures markets are pricing in two. Would a Yellen nomination result in an increase in short-term interest rates as markets price in a higher likelihood of a third hike? Or would short-term interest rates fall due to the removal of discounting for the more hawkish candidates? It’s also important to note that a vice chair needs to be appointed, and any appointment needs confirmation from the Senate.
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