America’s Next Great Federal Reserve Chair. No, it’s not the latest reality TV show (or is it?)

Donald Trump is expected to name the next Federal Reserve Chair in the coming days, and the most recent whispers out of Washington have Jerome Powell as the most likely nomination for the position. 


Whilst the past four presidents have not kept the market in suspense in the same fashion, most frequently offering to extend the term of the incumbent, we all know that President Trump likes to do things in his own way, and tends to flip-flop publicly before making decisions.  What makes this so interesting to the market is the fact that he is deciding between two people with very different views on Fed policy. 


John Taylor is a Stanford economist who is among the Fed’s most vocal critics, opposed the Fed’s stimulus campaign, and is the creator of the Taylor Rule. His rule states that the central banks should set their benchmark rates in response to changes in economic conditions, such as targeted vs actual inflation levels, full employment vs actual employment, and short term interest rates and in theory would have the Fed rate set at circa 4%, three times higher than it is today.


Jerome Powell on the other hand, a current Fed Governor who supported the Fed’s efforts to stimulate economic growth, now favours a gradual unwinding of those policies, which is much more in line with the views of existing Fed Chair, Janet Yellen (who Trump stills says he’s considering, but based on his previous comments regarding Ms. Yellen, and his statement that he’d like to put his own stamp in the Fed, seems a long-shot at best).


Given President Trump’s approach to the decision, while the whispers have Powell in the lead, it really could go either way.  In the past week Trump has conducted an informal poll of Senate Republicans, asking them to raise their hand for either Powell or Taylor (some Senators refused to participate saying that it is not an appropriate way to select the Fed Chair), and has also sought advice from TV personality Lou Dobbs of the Fox Business Network (who, after being visibly flustered, chose Janet Yellen). 


Given the very different viewpoints of the two remaining candidates, the market is very eager to see which way Trump goes.  If Taylor is appointed, then one would expect a more aggressive move to higher rates by the Fed, whereas with Powell, one would be looking for a continuation of the current trajectory for rates.  The former would be seen as supportive for the USD, and the latter would leave the USD much more open to data releases.


Author: John Glover


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