Is Janet Coming Back?

A lot of names have been thrown around to be the next head of the Federal Reserve. But who is the most likely person President Trump will name?

The current occupant, Janet Yellen, has to be considered the front-runner, although that doesn’t necessarily mean she’ll be renominated. Indeed, I would put the odds of her being reappointed at less than 50-50 – a lot less.

She does have several things going for her. First and foremost, she’s a known quantity. The markets would certainly be happy if Yellen were reappointed, if for no other reason than that they’ll know what they’re getting. With the major stock indexes all at or near all-time highs, and the bull market already nine years old, the market doesn’t want anything untoward to upset the status quo.

But as we should know well by now, stability isn’t exactly Trump’s comfort zone. Two weeks ago, he had no problem telling investors in billions of Puerto Rican bonds that they could pound sand, which caused a major meltdown in the price of those bonds (administration officials subsequently walked back his remarks).

Would he risk something like that happening to the entire bond and stock markets by not reappointing Yellen? (Even if she doesn’t get reappointed as Fed chair, Yellen’s term as a member of the Fed’s Board of Governors doesn’t end until January 2024, although it’s expected that she’ll resign if she’s not renamed as chair).

Besides the stability factor, the main reason why the markets like Yellen, of course, is because, in the words of Mr. Trump himself on the campaign trail in May 2016, “She is a low-interest rate person, she’s always been a low-interest rate person, and let’s be honest, I’m a low-interest rate person.” He reiterated those feelings in July in an interview with the Wall Street Journal, in which he added, “I think she’s done a good job.”

Lately, however, Yellen has gotten a lot more hawkish when it comes to interest rates and doesn’t appear to be a “low-interest rate person” anymore. In fact, she seems to have turned into the leading hawk at the Fed, her most recent pronouncements stressing the need to raise rates before inflation gets out of control, even if it’s in hibernation now.

“We continue to expect that the ongoing strength of the economy will warrant gradual increases in that [federal funds] rate to sustain a healthy labor market and stabilize inflation around our 2% longer-run objective,” Yellen said Sunday at the Group of Thirty’s Annual International Banking Seminar in Washington. That was merely a reiteration of what she has been saying for the past several weeks.

At an economic conference in Cleveland last month, for example, Yellen said, “It would be imprudent to keep monetary policy on hold until inflation is back to 2%.” She also warned that “we should be wary of raising rates too gradually. Moving too slowly could create an inflationary problem down the road that might be difficult to overcome without triggering a recession.”

In naming his choice, let’s not forget what got Trump elected – an anti-establishment, populist, America-first agenda that puts working-class Americans first. While both stock and bond investors would be happy if interest rates stayed near zero forever, savers haven’t done very well under either Yellen or her predecessor, Ben Bernanke. Remember when 5% on your savings account was the norm? Now you need to buy the lowest-rated junk bonds – Puerto Rican bonds, perhaps – to earn that kind of return.

Reappointing Yellen would be an endorsement of those anti-saver policies, so that definitely works against her.

So if it’s not Yellen again, who will Trump nominate?

Most of the recent discussion about the next Fed chair centers on a handful of men that Trump has reportedly interviewed over the past few weeks, including:

• Stanford University economist John Taylor. Taylor, a critic of the Fed’s easy-money stimulus policies, is the author of the so-called Taylor Rule, a mathematical formula according to which the Fed would set interest rates. That approach may be too radical to get Congressional approval, plus his appointment would mean yet another academic/economist to head the Fed.
• Kevin Warsh, a former Morgan Stanley investment banker and Fed governor and another critic of recent Fed policies. In a speech last December, Warsh said the Fed “needs to stay out of politics, stick to its mission and reform its strategy, operation, communications, and governance.” Trump should like that.
• Jerome Powell, a current Fed governor. A banker and lawyer by training – importantly, not an academic or economist – Powell seems to be the safe choice. He’s a Republican – which may or may not mean anything to Trump anymore – and he also favors low-interest rates.

If Trump truly wants a “low-interest rate person,” he could consider Neel Kashkari, currently the president of the Minneapolis Fed, to the chairmanship. Kashkari has emerged as the leading dove on the Fed’s monetary policy committee, advocating no interest rate increases until inflation hits the Fed’s 2% target and stays there.

I don’t take Kashkari’s appointment very seriously, except for the fact that he has been endorsed by Jeffrey Gundlach, the “bond king” who early on predicted that Trump would be elected when that prospect seemed laughable. So I don’t think we can dismiss anything or anybody.

Except for one person. “There’s no chance” Trump will reappoint Yellen, Gundlach said. I’d have to agree.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.