Trump Playing It Safe On Fed Pick...Unless The Next Person He Talks To Says He Shouldn't

Jerome Powell is the vanilla option for a rocky road president.
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(Trump image courtesy Flickr user Gage Skidmore)

(Trump image courtesy Flickr user Gage Skidmore)

President Trump continues to play his version of Apprentice: Federal Reserve Chair, and over the weekend a rash of headlines suggested he had settled on perhaps the most sensible Republican option available to him: current Fed board member Jerome Powell.

Prediction markets had also labeled Powell the odds-on favorite, though a slight wrench was thrown into the proceedings yesterday when he reportedly surveyed Republican Senators on their preference between Powell and Stanford economist John Taylor, who was seen as an outside contender but apparently has made the final cut to two options (and according to some reports won the straw poll in the room).

Powell has emerged as the leading Fed insider for the central bank's top job, though he does represent a departure in some ways from former chair Ben Bernanke, current Chair Janet Yellen, and even Taylor, all of whom made their names as pre-eminent academic economists. Powell, on the other hand, was a lawyer and earned his bona fides financially by rising through the investment banking ranks, working at the U.S. Treasury under George H.W. Bush and as a partner with the Carlyle Group.

This background informs Powell’s stance on financial deregulation, which is perhaps his most important distinguishing feature from Yellen. The current chair has indicated that she will oppose efforts to undo major portions of Dodd-Frank. Because of her legacy power and the byzantine nature of the financial rule making process, she could throw up major roadblocks to giving Wall Street free reign in markets again, which is perhaps why she has reportedly fallen by the wayside as an option.

Powell, on the other hand, has indicated that he is willing to play ball on the issue. He has argued that many of the rules are burdensome to smaller and medium-sized banks, a fact that would likely win him the support of smaller financial institutions which have strong sway in Congress. But Powell has also said that many of the rules applied to larger bank need to be simplified — central bank and financial world-speak for “weakened” — and indicted that he would support axing other rules for large banks and easing the annual stress test process. That last point in particular would also win him a healthy amount of support from the largest financial institutions, which loathe the annual capital-testing process.

Another major selling point for Trump in nominating Powell (especially compared to other rumored candidates Kevin Warsh and Taylor) is his dovish instincts on monetary policy. Powell has generally been viewed as one of Yellen’s most reliable allies on monetary policy issues as she and predecessor Bernanke implemented extraordinary easing measures.

While Trump railed against the low interest rates of the last decade during his campaign, the politician and real estate developer inside him quickly reversed course once he took office and admitted that he likes a low rate policy. Warsh, on the other hand, would almost certainly have pushed a much more aggressive tightening of policy — something that Trump, like his spiritual predecessor Nixon, will oppose for political purposes and strongly maneuver to prevent. And Taylor would bring his rather inflexible academic biases to policymaking and try to tie policy to his eponymous rule (check out that equation for a real fun time). Under Taylor's rule, and depending on how exactly it was calculated, rates would currently be substantially higher -- almost to 4% with certain assumptions.

The prospect of the Taylor rule playing a concrete part in policy has long been anathema at the Fed; Taylor's nomination would rouse the bank in all its technocratic fury to undermine his nomination process. Trump does love a political fight, but might be cautious to pick one that would lead to substantial uncertainty in markets about the future of the Fed and raise the prospect of tighter interest rate policy.

Whatever his public shouting about the central bank policy in the election, then, Powell offers the most pragmatic, and politically palatable, choice for Trump to make. We'll find out soon whether those factors, or deference to GOP Senators and his penchant for shaking up the established order, carries more weight.

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