Federal Reserve Chairman Appointment
Beyond interest rates and inflation, there might be a more basic question about U.S. monetary policy in 2018. It concerns Janet Yellen’s reappointment. Or rather, it concerns her dismissal. Will she or will she not be reconfirmed as the Chair of the Federal Reserve? It is still unclear. Trump has given mixed signals. The impression until recently has been that Janet Yellen’s Federal Reserve Chair was all but confirmed.
U.S. President Donald Trump has already been handed a final list of potential Federal Reserve chair candidates but despite the impressions, few or none of the people in Trump’s inner circle appear to have suggested a second mandate for Janet Yellen as Fed Chair. Instead, outsiders such as famous investor Jack Bogle have recommended Yellen. But Trump seems ready to replace her. (Source: “Vanguard’s Jack Bogle to Trump: Give Fed’s Yellen a Second Term,” Newsmax, September 28, 2017.)
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That said, Yellen remains among those considered in the final list of Federal Reserve chair candidates. As for the new names, one of the most frequently cited names was Gary Cohn. He’s a former Fed board member, but he appears to have lost favor with Trump. Then, there’s the hawkish (that is, pushing for higher interest rates) Kevin Warsh.
Janet Yellen sits in the middle as far as Fed interest rates are concerned. She’s the “goldilocks” central banker. She believes rates must increase, but she also fears that too abrupt a shift might do serious damage. So those in favor of a middle-of-the-way approach would prefer to see her remain. But, for those who subscribe to the “tearing off the Band-Aid” solution, Yellen’s departure represents a boon, as it were. This latter group would prefer Kevin Warsh.
Will Donald Trump Choose Kevin Warsh?
It would be premature to speak of a favorite candidate yet. Trump has certainly talked with Yellen, Cohn, and Warsh, among others. Clearly, it would act as an undue influence of the course of the markets if Trump betrayed his preference. Indeed, if they knew who Trump would pick to be the next Fed chairperson, investors will be able to gauge whether the era of easy money will end abruptly or gradually, depending on his/her interest rate approach at the Fed. Therefore, investors would get a better idea of the consequences that this could have on the dollar, the Dow, and the economy.
Choosing Warsh would remove the hesitation—or prudence—that Janet Yellen has shown. Yellen has allowed monetary policy to remain accommodating. Thus, we have a Dow heading toward 23,000 points, led by companies like Tesla Inc (NASDAQ: TSLA), whose stock reflects an alternate reality rather than the facts. How else would you describe a stock that goes up even as the company announces that it missed production targets by 84%?
Warsh would represent a win for those who see stock valuations as having inflated beyond reason. He’s also related to close friends of the president. But Trump likes to boast about the performance of the stock market. Thus, Warsh would represent a radical departure from Yellen. If you think stocks are priced too high, he might seem like a good pick.
Still, Warsh’s radical approach might not earn him the top spot at the Fed. So far, the only measurable success of the Trump presidency has been the stock market. The job numbers and the economy—good or bad—have more to do with Trump’s predecessor, Obama. Thus, the wise money will be betting on a new central banker who will more or less continue on Yellen’s path. Trump’s nomination will aim to shift the Fed more in line with Trump’s views, but without leaving a trail of stock destruction in its wake. If Trump could assure himself of greater control over Yellen, she would likely have been reconfirmed already. Her term ends February 2018.
