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‘You’re hired’: does Trump’s Fed pick matter?

In typical Trumpian fashion, the real estate mogul turned president took to Twitter last week, posting an Instagram video teasing his big Fed announcement to be revealed soon.

“It will be a person who hopefully will do a fantastic job,” Trump said, adding that he has “someone very specifically in mind”.

As he says about all of his enigmatic plans and proposals on healthcare reform and corporate tax, which have failed to get off the ground: “Everyone will be really impressed.”

Jay Powell, who has been on the Fed’s board of governors since 2012, has been cited as the front-runner by most publications. But Stanford economist John Taylor has also been identified by the Trump team as a top pick.

Powell is by far the “continuity candidate”, generally regarded as a centrist who has shown unwavering support for Yellen’s approach to slow and steady interest rate hikes and minimising the government’s $4.5trn asset holdings. Taylor, on the other hand, is the wild card, but nevertheless a respected thinker in the industry who current chair Janet Yellen admits has paved the way for the shape of current monetary policy.

Like so many other things about the Trump administration, the build-up to the reveal of the next chair of the Federal Reserve is completely unprecedented.

As others reporting on this event have noted, the practice of selecting a new Fed chairman, while a paramount political decision, is generally accompanied by little to no fanfare.

By contrast, Trump’s treatment of this time-honoured tradition has the trappings of a low-brow reality TV programme. Powell versus Taylor – Who will be the survivor? Who will be the lucky recipient of the final ceremonial rose? Or will there be a shock twist ending? Will Yellen file into the boardroom unannounced to be told: “you’re (re-)hired”?

‘An historic appointment’

But this choice is something which shouldn’t be taken lightly nor done for higher ratings, says David Coombs, head of multi-asset at Rathbones.

Coombs views the pick of the next chairman as “vital” on the basis that the person in that role is “one of the most powerful people in the world”, arguably “even more important than the politicians”.

“Right now, given where we are, nearly 10 years off the financial crisis and the unwinding of emergency measures, this is a historic appointment and the impact on the money markets and the stock markets could be huge,” says Coombs.

Though he suspects Trump will veer toward the “safe choice” i.e. Powell, “trying to predict what Trump will do is fraught with danger”. After all, “he likes to break the status quo and the elitist consensus”.

The best way to accomplish that would be to elect Taylor, who Coombs says “would almost definitely be more hawkish”. “That could have a significant short-term impact on markets. I suspect it would send bond yields higher quite significantly and equity markets lower.”

Fed will stay the course

Seven Investment Management investment manager Ben Kumar begs to differ over the importance of Trump’s pick. The “Fed is on course”, he argues, and unlikely to deviate no matter who happens to be sitting in Yellen’s chair when she (more likely than not) relinquishes her crown in February 2018.

“When you have a large institution and you aggregate all of their knowledge, it tends to be done along pretty orthodox lines. If someone comes in and says, ‘Yellen is completely wrong, we need loads more money and the economy is actually buggered’, that’s not something they can do particularly easily without upsetting the markets.”

Kristen McGachey

Kristen joined Last Word Media and the world of financial journalism in April 2016, leaving behind a career in a legal publishing firm as a senior researcher turned assistant editor. This native Angelino...

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