Who Will Lead The Fed?
By Biagio J. Raimondi
As the end of Janet Yellen’s term approaches, all eyes are on who President Trump will appoint to succeed her. Trump has said that he would consider appointing Yellen to a second term, but he also has three other candidates that he is considering. According to The Wall Street Journal, Trump recently met with Kevin Warsh, Jerome Powell, and John Taylor as potential candidates.
John Taylor is an economist from Stanford University who has been vocal with his criticism of the Fed’s easy monetary stimulus package. He argues that low interest rates will eventually hurt the economy as a whole and advocates for higher interest rates in response. Taylor is most known for his groundbreaking monetary formula on how to determine economic output in relation to the Federal Funds Rate, widely known as the “Taylor Rule.” If he is named Fed chair, we can be sure that he would base his decisions off of this formula. The Taylor Rule is not currently used during policy creation as many economists doubts that this is a viable way to determine interest rates.
Kevin Warsh is another critic of the Fed’s low borrowing costs. Warsh was a Fed governor from 2006-2011, in the midst of the financial crisis. Prior to his time serving as a fed governor, he was an economic advisor to President George W. Bush. Warsh has many other views that contradict the opinions of the current Fed chair, Janet Yellen. If Trump decides to appoint Warsh, it is possible that the world markets will negatively react to the swift change in policy that can be expected.
Jerome Powell has supported a slow raise of the Federal Funds Rate, which has been orchestrated by Janet Yellen. Powell has been a governor of the Fed since 2012 and an ally to Chair Yellen this entire time. The appointment of Powell would most likely cause the policies of the Fed to follow Yellen's, consisting of monetary easing that began last year ago. Powell is a vocal supporter in the reduction of banking regulations, something that Donald Trump is looking for.
Finally, there is Janet Yellen. Yellen was appointed Fed chair in 2014 after she served under Ben Bernanke during the financial crisis. Under her leadership the Fed implemented bank restrictions that would provide security to our financial system as it was starting to unwind the post-crisis bond holdings and stimulus package. Several world financial leaders are in full support of Yellen being re-appointed. “We all admire Janet Yellen very much,” said Ewald Nowotny, a member of the European Central Bank’s governing council. In their view, a second term for Yellen would allow her to carry out her plan of monetary easing as well as keep a pair of trusted hands at the helm of the world's largest economy.
President Trump is expected to make his final decision in the coming weeks. At this point in time, he has met with all four candidates and wants to ensure his pick will bring economic growth while staving another recession. It is believed that Donald Trump’s main focus will be on which new Fed chair will deregulate the banking industry and roll back restrictions set in place by the Dodd-Frank Act. Yellen has been an intense supporter of Dodd-Frank, yet as the time to name her potential replacement approaches, she has opened up to the idea of deregulating Wall Street, increasing her chance of serving a second term. If the president decides on Yellen, it would be considered by many as a safe pick that would ease global financial markets.
Ultimately, it is up to Donald Trump, and all eyes are on him as he makes his most important economic decision yet. His pick for Fed Chairman will serve until 2022 and will be responsible for unwinding the massive crisis era stimulus package put in place after 2008. If this process is rushed, there is a strong possibility that the U.S. economy could slip into a recession. Trump’s pick will be tasked with guiding the economy back into a low stimulus position, and with the wrong person at the helm rushing monetary easing, chaos could disrupt both U.S. and world economies.