October 20, 2017

Fed Chair Nomination

This will be a dynamic post as we enter the Fed Chair Nomination period, a critical juncture for the U.S. economy, for the current U.S. administration and finally (and this is my main concern) for the global financial markets. I will be quoting and linking to articles I find interesting. I may also share some of my thoughts on the subject.

Current Fed Chair Janet Yellen has been at the helm since February 3, 2014, when she was appointed by President Barack Obama, and her term ends on February 3, 2018. Who appointed her is relevant to her chances of being renominated for a second term. Other relevant points include:

  • Her perceived performance as chair by the Market participants, the White House, the punditry (media analysts, economists and in-house bank and investment bank experts).
  • The anticipated effect her non-renomination would have on the Markets 
  • The political repercussions of the decision. 
  • The identity, qualifications, perceived biases of the other possible candidates, who are all identified in the article quoted below.

Here's a quote from a Bloomberg article in favor of reappointing Janet Yellen as Chair of the Board of Governors of the Federal Reserve System:
Yellen and her predecessor Ben Bernanke built broad consensus within the Fed in support of radical measures, and that consensus helped restore calm and confidence in financial markets and the wider economy. It would be rash to cast these gains aside.
[...] At the moment, an abrupt change in policy isn't called for. Faster progress on normalizing interest rates and reducing the Fed's distended balance sheet would be good, but that is not to call for a fundamental rethink. An appointment raising the possibility of such a change would be a needless risk. The best and safest choice is Yellen.
Here's a quote from a Business Insider article by David Rosenberg, chief economist and strategist at Gluskin Sheff, formerly a long time chief economist at Merrill Lynch and one of the most respected voices in Finance, who plays down the importance of who's the head of the Federal Reserve and places more weight on the institution in general:
"The Fed is a democracy, not a dictatorship," [David Rosenberg] told Business Insider. "This chatter and talk about who the next Fed chairman is is interesting, but I think it's less relevant than a lot of other people do." 
Alan Greenspan is one example of a chairman who became bigger than the institution, Rosenberg said. But he was an exception. 
This just in: we have a favorite! Namely, Federal Reserve Governor Jerome Powell, according to this Politico article.
Powell, known as Jay, has been heavily favored by Treasury Secretary Steven Mnuchin, who is leading the Fed chair search for Trump. 
Other finalists include former Fed Governor Kevin Warsh, Stanford economist John Taylor and National Economic Council Director Gary Cohn.
"They’re all at the same level of consideration at this time. The president said himself on Tuesday, he likes all of the candidates and has great respect for them all," White House spokeswoman Natalie Strom said.
 
Of the five finalists, Powell would likely face the least opposition to confirmation in the Senate, according to interviews with nearly a dozen members of the Banking Committee.
Here's his bio from the Federal Reserve website.

If you believe in the wisdom of crowds and trust prediction markets, here's a link to PredictIt.

Here's an article that recommends choosing the most politically savvy contender rather than the best technocrat. I would tend to agree but it's hard to judge somebody's political chops before a crisis hits. Having been "in the room" and witnessed crisis management up close is certainly a big plus. Janet Yellen was a voting member of the FOMC in 2009. Draw your own conclusion (Narayana Kocherlakota does it here). Here's a quote from the article:
But the next time major economic volatility comes around, Fed decisions will be scrutinized and politicized like never before. This will happen in the mainstream media, on social media, and perhaps by our very own president in his tweets or offhand remarks. The key factor for any Fed leader will be the ability to maintain and project a coherent, unified voice at the Fed, so that the Fed remains an island of relative sanity in the polarized nation. This will be a problem of crisis management, but unlike Bernanke’s crisis management it will be fought first and foremost in the trenches of public opinion. 
What does this mean for the short-listed candidates? Former Minneapolis Fed president Narayana Kocherlakota made a strong case in Bloomberg View for Janet Yellen, and I agree she has done a good job to date. I am less sure she will be able to lead and build consensus in 2019, when the appointed board members will all be Republicans and the bloom of the economic recovery may have worn off. She still deserves serious consideration, but I would judge her less on her monetary policy decisions and more on how she might manage relations with the board, president and public during a crisis. One of the major arguments in her favor is simply that Trump often appears to be tougher and more erratic with his own nominations than with holdovers from President Barack Obama’s era, and perhaps he would continue to regard her as one of the latter. 
Is this it?
President Donald Trump stoked the sense of drama surrounding his choice for the next Fed chairman Friday as he tweeted out a video teasing an announcement he said would come next week. 
The president is leaning toward appointing Federal Reserve Governor Jerome Powell to be the next chairman of the Fed, according to three people familiar with the matter.
Jerome Powell is set to become the next Fed Chairman. He has been supportive of all Janet Yellen's decisions and rationales, but, despite what the following excerpt would have you think, that says little about what he may do going forward. We shall see.
Mr. Powell, a Fed governor since 2012, is a Republican with deep roots in the party’s establishment and in the financial industry. He has steadily supported the Fed’s current approach to monetary policy and financial regulation, creating an expectation that he would bring continuity to the role. 
One person familiar with the president’s thinking described Mr. Powell as the "safe" choice and the one who most closely fit Mr. Trump’s penchant for filling his government with characters from “central casting,” as he often puts it.
It's a done deal.

It is now official. It's important to note that Jerome Powel, unlike his four predecessors is not an economist, which leaves a fairly big question mark.
But some argue that there is more uncertainty surrounding Mr. Powell’s approach than for other recent Fed chairs. Lewis Alexander, chief United States economist at Nomura Securities, said it is unclear how aggressive Mr. Powell would be in responding to an economic slowdown. 
“I don’t think it’s right to think of Powell as a Yellen clone,” Mr. Alexander said. “In terms of the core issues of monetary policy, we just don’t have much of a baseline for him.” 
Mr. Powell would also be the first Fed chair in four decades who does not have a degree in economics — meaning his opinions may not be as fully formed as some of his predecessors. He also lacks a body of academic work that analysts could parse for his views.
(Latest Update: 11/03/2017)

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