Powell, Cohn, Taylor, Warsh or Yellen – The Next FED Chair Will Decide the Economy’s Path

The Chair of the Federal Reserve, currently held by Janet L. Yellen is now up for grabs, with Yellen’s 4-year term due to end on 3^rd February 2018.

With the FED Chair considered to be the most influential central banker in the world, responsible for the world’s largest global economy, there’s plenty of focus, not only on who is in the running and the possible implications from a monetary policy outlook perspective, but also on whether the position and the FED itself can continue to remain independent from the U.S government.

Speculation on who is the front-runner has had an influence on the direction of the Dollar in recent weeks, with the categorisation of the candidates, who have been selected by U.S President Trump, into conformists and nonconformists or doves and hawks driving the Dollar depending upon whether there’s a dove or a hawk leading the race.

While there is no formal date set for when an announcement will be made on who will be sitting in the hot seat come 4^th February, a White House spokesperson said on Wednesday that Trump will announce the next FED Chair in the coming days, with five candidates currently in the running.

At the time of writing, there appears to be no clear favourite, with the main front runners being Jerome Powell, a current voting member of the FOMC and FED Board of Governors, former FED Board of Governors Kevin Warsh, Stanford economist John Taylor, current FED Chair Janet Yellen and White House chief economic advisor Gary Cohn.

The Next Fed Chair Odds

As things stand, Jerome Powell remains the favorite for the Chair, PredictIt putting the odds of a Powell selection at 42%, with Powell having the backing of U.S Treasury Secretary Mnuchin, who may soon find out how much of the U.S President’s ear he actually has.

Second in the running, following yesterday’s meeting with Trump, is current FED Chair Yellen with odds of 24%.

Behind Yellen sits Taylor and Warsh, with Taylor having been reported to have impressed the U.S President in an interview at the start of the week that led to Taylor moving ahead of Warsh, though sentiment has shifted with the markets now seeing Trump picking a more dovish FED Chair who not look to reap havoc on the markets.

At the back of the pack is Trump’s economic advisor Cohn, who has fallen well behind, with just a 7% chance of being selected and now considered an outsider.

While PredictIt has given each of the front-runners the odds of selection, the fact that President Trump is making the decision certainly makes it an unpredictable one and, while history suggests that new President’s tend to go with sitting FED Chairs, Trump’s nonconformist approach to the presidency and intentions to deregulate removes the benefit of history.

Trump’s Decision: Different Economic View, Different Future

Each of the frontrunners has differing views on financial deregulation and monetary policy and the combination of the two will certainly be key considerations for Trump as he makes one of the most important decisions of his first term in office.

Front-runner Powell is considered to be more in favor of financial deregulation and more hawkish on monetary policy than FED Chair Yellen, while considered to be more dovish on monetary policy and more conformist on financial regulation than both Taylor and Warsh.

Both Warsh and Taylor have a strong history together and both are considered to be supportive of deregulation, which would be aligned with Trump’s aspirations to take the pressure off banks, though both are considered to be particularly hawkish on monetary policy, which could see the FED take a more aggressive path towards monetary policy normalization.

U.S President Trump has certainly been vocally in favor of the low-interest-rate environment that has supported U.S equity markets and helped maintain a weaker Dollar, so while both Taylor and Warsh favor deregulation, there will be some concern over monetary policy and the possible effects on the equity markets and of course, the U.S Dollar.

Another factor to consider with both Taylor and Warsh is that both are likely to be advocates of a rules-based approach to monetary policy, based on inflation and full employment, an approach that is preferred by some of the President’s closest aides, not to mention the Republican Party ethos of removing policy discretion from the hands of the FED.

The downside is that a rules-based approach almost removes accountability from the FED and places it firmly in the hands of Congress and, with Trump’s tweets on economic growth and U.S equity market rallies, a slowdown in growth and a market reaction to a Taylor based model, which suggests that the FED Funds Rate should be sitting nearer 3%, maybe a pill too bitter for the President to swallow.

While Trump was quite critical of Yellen during the presidential campaign, the weaker Dollar and record highs enjoyed by the U.S equity markets, not to mention the ever-tightening labor market, have certainly put Yellen back in the running. The current FED Chair certainly doesn’t require any introductions but is considered the most conformist on financial regulation and the most dovish on monetary policy than the other front-runners.

A safer bet for some may even be Trump’s current chief economic advisor Cohn, who will likely be on the more dovish side on rates, whilst aligned with Warsh and Taylor on regulation, though it would be a big call to give the top spot to the laggard.

There were no comments from the Trump-Yellen meeting on Thursday, but with Trump having praised Yellen’s efforts last month, the chances of Yellen remaining in the chair has improved in recent days.

It’s likely to boil down to which of the candidates is more open to deregulation that marries with Trump’s intentions to ease banking regulations in the interest of growth, while also being considered adept in being able to shift between a rules-based and discretionary approach in the event of a crisis. With that in mind, a surprise is certainly plausible and the very uncertainty has left the markets second-guessing in recent weeks and will likely to continue to do so until the FED Chair has been announced.

News overnight hit the wires that Trump is veering towards Powell in another series of leaks and with, all things considered, my bet would be Powell over Yellen, Powell’s support for deregulation likely to be the clincher.