Our initial reaction to word that Federal Reserve Vice Chair Stan Fischer is stepping down next month was two-fold: the first was how Fischer’s retirement marks the departure of one of this generation’s giants in monetary policy thinking; the second is that it makes the possibility of a “twin nomination” of both a Chair and Vice Chair next year that much more likely.
A few — speculative — points on the succession of the Fed leadership that looms in the coming months:
** We believe that National Economic Council Chairman Gary Cohn is indeed quite keen to secure President Trump’s nomination to succeed Fed Chair Janet Yellen when her current term ends in February. Assuming he maintains good relations with his president for the next few months, the nomination is probably his to lose. But Cohn does face two significant hurdles, one political and one personal.
** The political hurdle is a substantial Senate Republican reluctance to confirm Cohn due to the “Goldman Sachs factor,” which we understand ranges from at least three to as many as a half dozen or more Republicans. We for now do not think he could win Senate confirmation. But that is where the tax cuts enter into the political calculations, in that credit for helping to push tax cuts through this year may neutralize the resistance to Cohn securing confirmation.
** The personal factor is Cohn’s lack of experience, perhaps focus, on the increasingly complex issues of monetary policy, and just as importantly, a deeply ingrained Fed collegial, consensus style culture that sharply contrasts with a Wall Street “take charge” style of management. It is hard to imagine Cohn sitting through two days of debates over R* star or new academic theories on the inflation dynamics.
** But that is where Stan Fischer’s resignation next month could now enter into the picture: one rumor circulating in some very narrow circles in Washington was the prospect that a Cohn chairmanship would require a very hands-on, academically qualified Vice Chair to undertake most of the heavy lift on the theoretical aspects of modern monetary policy. We suspect the most likely and suitable candidate to fit that job description would be Columbia University’s Glenn Hubbard.
** Hubbard is also actively, albeit discreetly, lobbying to be President Trump’s nominee to succeed Chair Yellen. But we understand his main base of support is in the high New York financial circles and more to the point, his primary channel to the President is Cohn. One speculation — and indeed all of this is for now speculation — is that Hubbard accepts a Vice Chair nomination on the assumption he would be the next Chair after a single term by Cohn, who perhaps returns to Wall Street.
** Initially, we had more or less assumed a time line in which President Trump would only announce his choice about the Fed chairmanship in December or thereabouts. That would mean, in effect, that whoever the nominee is would be highly unlikely to be voted through by the Senate Banking Committee and confirmed in a floor vote before Chair Yellen’s current term ends in February. In that scenario, we would expect Chair Yellen to be asked to stay on as an acting Chairman for a few months. In 1996, former Fed Chairman Alan Greenspan did just that for a few months. That timeline, in theory, could now be brought forward by a few months.
** All of this at this point is highly speculative, and such a “twin nomination” would be unprecedented and entail considerable complications. The closest template is probably President Obama’s twinned nomination in 2011 of Jerome Powell and Jeremy Stein, a Republican and Democrat respectively, to ensure confirmation after the Republican-controlled Senate voted down a previous nomination of Bob Diamond, a Nobel Prize winning academic.
** Of course, President Trump could always still opt to simply reappoint Chair Yellen to another four-year term. We would wonder how much she would relish chairing a Trump-appointed Board of Governors, but we suspect if asked, she would serve. It would be certainly welcomed by the Fed staff and the markets which would see safe hands and a continuity of policy amid the otherwise chaotic policy decision making across Washington these days. But, on balance, we think it more unlikely than not that Chair Yellen will be asked to stay on for another term.
** Kevin Warsh, the former Board governor and current visiting professor at Stanford University is another candidate. He is openly lobbying for the job, primarily appealing to the populist instincts of the President and the conservative wing of the Republican party. He has at times pitched himself as a reformer of the Fed who after having already served briefly on the Board, knows how to cut down the size of the Fed and to reduce its market “footprint.”
** Another candidate, and just about everyone’s favored alternative, is Fed governor Jay Powell. He is already taking up much of the day to day duties of Fischer as the Vice Chair, as well as the banking supervision tasks of former Governor Dan Tarullo. He is also said to be quite interested in the job. He is well respected inside the Fed, is a Republican and would be easily confirmed without much fanfare, and is independently wealthy, said to be a plus in the eyes of President Trump.
** First though, the Senate has to confirm Randall Quarles, the Administration’s nominee to fill for the first time the long vacant Vice Chair for Banking Supervision. We expect that to come no later than sometime in early October, even with the Senate’s already full legislative plate, and for Quarles to be attending the October 31-November 1 Federal Open Market Committee meeting.
** We understand the vetting process is at various stages but close to finishing for the two other likely Trump Administration nominees to the Board, Carnegie Mellon’s Marvin Goodfriend, and Bob Jones, the President and CEO of Old National Bankcorp of Indiana (see SGH 6/28/17, “Fed: Board Transitions”). In theory, both could be confirmed in time for the FOMC’s December meeting when the Committee is likely to be weighing whether to push ahead with a third rate hike this year in the policy normalization strategy.