Fed: A Taylor-Powell Leadership Era

Published on October 13, 2017
SGH Insight
The likelihood that President Trump will select Stanford University's John Taylor as his nominee to succeed Federal Reserve Chair Janet Yellen when her term ends next February should be taken very seriously.

Taylor met with President Trump, Vice President Mike Pence, and Treasury Secretary Steven Munchin for around an hour on Wednesday afternoon. The President is understood to have been very impressed.
Market Validation
(Bloomberg 10/16/17)

The dollar extended gains late Monday after economist John Taylor was said to make a favorable impression on President Trump during an interview for the position of Fed chairman.

* The Bloomberg Dollar Spot Index rose 0.3% as people familiar said Taylor impressed Trump, while the prospects of former Fed Governor Kevin Warsh faded.

(Bloomberg) -- Treasuries extended overnight losses, led by belly of the curve, pushing 5s30s through 87bp level; morning weakness was added to over afternoon session as report suggested that Fed chair candidate John Taylor made a favorable impression on Trump.

UST yields rose as much as 4.5bp, in 5Y tenor, shortly after the close; 5s30s flattened to 86.5bp, lowest level since 2007.

TYZ responds to the prospect of Taylor

The likelihood that President Trump will select Stanford University’s John Taylor as his nominee to succeed Federal Reserve Chair Janet Yellen when her term ends next February should be taken very seriously.

Taylor met with President Trump, Vice President Mike Pence, and Treasury Secretary Steven Munchin for around an hour on Wednesday afternoon. The President is understood to have been very impressed.

Federal Reserve Governor Jerome Powell, the other front runner, is understood to have indicated his willingness to accept a nomination as Vice Chair, now vacant after Stan Fischer wrapped up his last days in the position this week.

Both would be easily confirmed in the Senate and both would bring considerable gravitas to the leadership of a Trump-nominated Federal Reserve.They would be taking the helm when the Fed will be entering into a next critical era after the academic leadership of former Chairman Ben Bernanke and Yellen successfully steered the Fed and the economy through the financial crisis and the long period of “normalizing” rates and balance sheet, and bringing the economy back to maximum employment in the process.

Taylor and Powell, like Randal Quarles, the recently confirmed Vice Chair for Banking Supervision, share a common stance on loosening some of the supervision of the banks under Dodd Frank, which is a core policy ambition of the Trump Administration.

Taylor is highly regarded in monetary policy circles, and previously served in the Treasury under President George W Bush and on several Councils of Economic Advisors.

Taylor has generally been seen as hawkish on monetary policy, largely on account of an assumption interest rates would be substantially higher than they are now if the Fed had been following the famous “Taylor Rule.” But we understand that would assume no adjustments in the estimates of R* or the output gap that go into the equations for the Taylor Rule. If updated, it would probably place the rate path under a Taylor Chair not all that distant from the Yellen-crafted gradual ascent in rates that is expected to leave fed funds at a 1.25%-1.5% target range by year-end.

Powell, a lawyer by training and investment banker before coming to the Board of Governors after being nominated by President Obama in 2012, is well regarded inside the Fed. He has been a close ally of Chair Yellen on the monetary policy normalization strategy of the last few years, and he provided a quiet counterbalancing voice to the more aggressive implementation of Dodd Frank banking regulations under former Governor Dan Tarullo. Powell took over the responsibilities for the Board’s banking oversight committee after Tarullo stepped down earlier this year.

We also understand Kevin Warsh, another candidate widely touted in the media and in Street commentary as an odds on favorite, has in fact lost much of his appeal, and mayno longer be in serious contention. Nor is Gary Cohn, the Chair of the President’s National Economic Council. Chair Yellen herself, while not out of the White House consideration, still seems unlikely to be asked to serve a second term.

There are said to be other candidates still undergoing review in the tightly managed White House selection process. But an announcement of the nominee to succeed Chair Yellen is expected before the end of this month or perhaps the first week of November. Even with the Senate’s loaded legislative calendar through year-end, it should leave enough time for the confirmation hearings and a floor vote before February 3, when Yellen’s term as Chair ends.

Reflecting the high stakes in the next generation of Fed leadership, the selection process has been thorough and aiming for a broad mix of talent and expertise that would be filling what will be five new appointments to the Fed’s Washington-based Board of Governors, assuming Powell remains, albeit promoted to the Vice Chair (or Chair) position. Governor Lael Brainard would be the only remaining pre-Trump governor on the Board after Yellen leaves in February. But there is a sense she will be leaving her position at some point next year.

Quarles, confirmed by the Senate last week, will be attending the Federal Open Market Committee meeting at the end of this month. Quarles and Powell, incidentally, know each other well, having worked together during the elder President Bush’s administration, when Quarles worked for Powell in the domestic finance division of the Treasury.

Two other nominees, Carnegie Mellon professor Marvin Goodfriend and Old National Bank Chairman and CEO Robert “Bob” Jones, are still at various stages of the vetting process after having been approached by the White House on nominations to the Fed Board, and both have accepted. There is apparently still some vetting to be finished, but their nominations are understood to be awaiting scheduling for confirmation hearings before the Senate Banking Committee.

Goodfriend’s nomination in recent weeks was rumored to have run into some difficulties in conservative policy circles over his paper on the feasibility of negative interest rates presented at the Federal Reserve Bank of Kansas City’s Jackson Hole conference last year. But it is unlikely to prove fatal to his nomination.

Jones would fill the community banker post, and he previously served on the Board of Directors of the Federal Reserve Bank of St. Louis. A native of Indiana, Jones is also understood to have the strong backing of Vice President Pence.

In addition, with Powell moving up to either the Vice Chair or Chair position, there is still yet another slot for the Trump Administration to fill. One scenario had a slot being offered to David Malpass, who was an economic advisor to the Trump campaign and Trump transition team, and who was only just recently confirmed after a long delay for an appointment as Undersecretary for International Affairs at the Treasury.

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