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Trump’s Short List for Fed Chair Features These Hawks and Doves

The president wants to announce his choice in the next few weeks
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Here’s a look at the candidates President Donald Trump is considering over the next few weeks to nominate as chairman of the Federal Reserve and where they stand on monetary policy.

Trump has met with Fed Chair Janet Yellen, National Economic Council Director Gary Cohn, Fed Board Governor Jerome Powell and former Governor Kevin Warsh as he considers his choice to head the U.S. central bank, three people familiar with the discussions said last week. Stanford University economist John Taylor is also on the list of recommendations put together by Trump’s advisers. There’s no clear front-runner and outlier candidates haven’t been ruled out.

Trump has said he expects to make a decision on the Fed-chair search this month. That’ll kick off a months-long process of Senate confirmation before Yellen’s current term expires in February.
 

Photographer: Andrew Harrer/Bloomberg

Janet Yellen

Hawk or Dove? Yellen, 71, has had a track record of keeping rates low over her four-year term. She has consistently supported gradually tightening policy and gradually unwinding the balance sheet. Yellen has been a “super-dove,” though “sprouting a few hawk feathers,” Amherst Pierpont Securities Chief Economist Stephen Stanley said.

Last month, Yellen said it’s uncertain exactly why inflation has been running below the Fed’s 2 percent target -- which it has mostly missed for the past five years. Weak inflation “strengthens the case for a gradual pace of adjustments” in rates.

Regulatory Views: Yellen has defended stricter banking rules introduced after the 2007-2009 financial crisis. “Any adjustments to the regulatory framework should be modest,” she said in August.

Pros: Trump told the Wall Street Journal in July that he favors low rates, adding: Yellen has “historically been a low-interest-rate person.”

Cons: Yellen is a Democrat appointed by Barack Obama who’s led the regulatory policies the Trump administration is seeking to change. She’s an academic, while the administration has preferred installing business people into top positions.

 

Photographer: Andrew Harrer/Bloomberg

Gary Cohn

Hawk or Dove? From the little we know, Cohn would likely be at least as dovish as Yellen. In 2015 when Cohn was still president of Goldman Sachs Group Inc., he questioned Yellen’s plan to hike rates, saying she had “no legitimate argument to raise rates without inflation being close to -- or having some inkling that it’s approaching -- 2 percent.”

Cohn, 57, has criticized the Fed’s move toward transparency, arguing in a March 2016 speech that the central banks’ “very definitive forward guidance has gotten the markets very confused.”

Regulatory Views: In February, Cohn said rolling back regulations is a central priority for the White House. “We need to deregulate and cut down the regulatory process to grow jobs in this country.”

Pros: Cohn, who has helped lead the president’s drive on a tax overhaul, would seem to meet Trump’s twin goals of wanting low interest rates and pushing deregulation. Most Republican policy makers are more hawkish, by contrast.

Cons: Cohn’s prospects have dimmed after he publicly criticized remarks the president made in the wake of racially charged violence in Charlottesville, Virginia. Cohn was at Goldman when the firm engaged in some of the era’s most controversial trades, and he helped manage the firm’s pre-crisis bet against the housing market. That background would be sure to be scrutinized in any congressional hearings.

 

Photographer: T.J. Kirkpatrick/Bloomberg

Jerome Powell

Hawk or Dove? The Fed governor was rated as neutral on monetary policy by the Bloomberg Intelligence Fed Spectrometer. He’s never dissented on the Federal Open Market Committee since taking office in 2012. A survey of 30 economists in March found he was slightly more dovish than average Fed central bankers.

Powell, 64, in August presaged  comments by Yellen that the softness in inflation this year was a “mystery” and said the low price readings allowed the Fed to be patient in raising interest rates. He also privately voiced skepticism of the third round of asset purchases – known as quantitative easing – launched in 2012, but ended up voting for the initiative championed by then-Fed Chairman Ben Bernanke.

Regulatory Views: Powell this month said he wants to preserve gains from post-crisis reforms, though “we can do it more efficiently. That’s the process we are actively engaged in right now.”

Pros: Treasury Secretary Steven Mnuchin favors Powell, according to Politico. “Powell has Republican credentials, knows the board and FOMC well” and “has impressed with his grasp of monetary economics,” Deutsche Bank Chief Economist Peter Hooper wrote in a report.

Cons: Powell’s continuity might not be as appealing as a bigger Fed overhaul for the Trump administration. Powell “appears to largely support” the 2010 Dodd-Frank Act that increased regulations in the financial industry, which conflicts with plans by this administration on scaling back rules, Capital Economics Chief U.S. Economist Paul Ashworth wrote in a report.

Photographer: Daniel Acker/Bloomberg

Kevin Warsh

Hawk or Dove? The former Fed governor is among the most hawkish of the contenders. In January, Warsh said the Fed was close to achieving its goals of maximum employment and price stability. “Tell me again why interest rates seem to be so far away” from the historical target, Warsh said.

Warsh, 47, has said central bankers should be concerned about elevated asset prices. “I see way too much complacency,” he said. “When I see volatility measures in the stock market and bond market at historic lows, if I were a central banker, I wouldn’t take comfort from that.” As a Fed governor, he opposed the second round of quantitative easing, then voted to support the stimulus to provide a greater consensus behind Bernanke.

Regulatory Views: He co-wrote a commentary in July supporting the Trump administration’s plans for higher growth in part by reducing regulations. He has said Fed regulation “now micromanages big banks and effectively caps their rate of return.”

Pros: His regulatory views fit closely to Trump’s so he would be more likely to overhaul rules as opposed to fine-tuning them. While less dovish than Yellen, “Warsh has never seemed doctrinaire on rates,” said Amherst Pierpont’s Stanley. Warsh also has a personal connection. He’s married to Jane Lauder, daughter of Trump friend Ronald Lauder and a global brand president at the cosmetic company founded by her grandmother, Estee Lauder.

Cons: He’s the youngest and least experienced of the contenders. His concerns about inflation as a Fed governor have proven to be misplaced, as inflation has undershot the Fed’s 2 percent goal. His candidacy has attracted opposition from left-leaning activists, particularly for his cheerleading prior to the financial crisis of Wall Street innovations.

Photographer: Sam Hodgson/Bloomberg

John Taylor

Hawk or Dove? He’s likely among the most hawkish of the contenders. Taylor created a widely cited rule for setting interest rates that’s named after him. The 70-year-old has called for rules-based policies and argued the Fed has engaged in too much discretion. He’s also argued the Fed’s unconventional policies, including asset purchases, haven’t worked. “The Federal Reserve is a little behind the curve” in raising rates, Taylor said in January.

A strict adherence to the so-called Taylor Rule would have required the Fed to hold interest rates higher during most of Yellen’s four-year term, though its policy prescription varies a lot depending on what assumptions are made about the economy’s potential rate of growth.

Regulatory Views: Taylor has argued less regulation is key to pro-growth policies. “To turn the economy around we need to take the muzzle off, and that means regulatory reform, tax reform, budget reform, and monetary reform,” he wrote in his blog.

Pros: Taylor has served in four presidential administrations. He was part of the Council of Economic Advisers under Gerald Ford, Jimmy Carter and George H. W. Bush. George W. Bush named him undersecretary for international affairs at the Treasury. His Taylor Rule has been widely quoted by leading central bankers including those at the Fed.

Cons: “The various iterations of the Taylor policy rule almost certainly would mean higher rates,” Bloomberg Intelligence economists wrote in report. “If Trump wants to push for 3 percent GDP growth, Taylor will almost certainly make the task all the more challenging.”

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