Who will be the next Fed chair? It won’t be Janet Yellen. President Trump is no fan of the current chair. An Obama appointee from 2014, Yellen has chosen to raise interest rates gradually while the Fed unwinds the quantitative easing program it started back in 2009. Trump criticized Yellen’s approach during the campaign, saying she should be “ashamed” of herself for keeping interest rates low. He even accused her of falsely inflating the stock market to boost Obama’s approval ratings.
Trump has been friendlier since he took office, but all signs point to him replacing Yellen when her term expires early next year. He’s indicated he’ll make a choice within the next few weeks. According to PredictIt, a binary options market that handicaps future political outcomes, the race to replace Yellen is down to two main contenders—Kevin Warsh and Jay Powell. Right now, Powell is the favorite with 46/100 odds. Warsh follows at 38/100.
Kevin Warsh – Warsh worked as a Fed governor from 2006 to 2011. Before that, he was an investment banker at Morgan Stanley and an advisor to President George W. Bush. Few people know finance better from a practical standpoint.
Warsh is a clear hawk, favoring higher interest rates and lower liquidity. Back in 2009, Warsh lobbied his colleagues at the Fed against using quantitative easing to jumpstart the US economy. He has continued to argue for higher rates since leaving the Fed, working for the libertarian Hoover Institution at Stanford University.
In a 2015 interview with CNBC Warsh accused the Fed of confusing markets with an over-active monetary policy:
“Financial markets and the Treasury market are telling us almost nothing about the state of the economy because central banks are influencing those prices with every word, with every nuanced speech from every reserve bank president. We would be better off if markets were setting prices instead of taking their lead from a bunch of government officials seven years into a U.S. economic recovery.”
Here’s the main question: If Warsh is the next Fed chair, will he push for faster interest rate hikes? It’s almost certain he would. Earlier this year he called for the Fed to reduce its inflation target to 1% from the current 2%.
Jay Powell – Powell was not even on the radar when we profiled the leading candidates back in August. He’s emerged since then as a middle-of-the-road choice. A former investment banker and treasury official under President George H.W. Bush, Powell currently serves as a Fed governor. In contrast to the Warsh, Powell would prefer to keep more continuity with Yellen’s policy.
That would mean raising interest rates, but raising them gradually. He said as much in an interview: “We are at or close to full employment, inflation is nearing target and the economy has significant momentum. In my view it will be appropriate for us to continue to gradually raise rates.”
Powell is also less hawkish than Warsh on inflation. He’s happy with the Fed’s current target of 2%. In fact, he’d be in favor of a looser policy to get inflation above its current level of 1.4%.
That puts him closer to Yellen and perhaps at odds with the President’s own views. However, here’s one area where he really agrees with the POTUS—financial regulation. He thinks the financial sector is over-regulated and dragging down economic growth. Powell isn’t anti regulation in general, but earlier this year he published a paper arguing for fewer regulations on community banks and simpler rules overall. If chosen as the next Fed chair, Powell will push for lighter regulations.