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Who will by the next Chair of the US Federal Reserve?

President Trump has signalled he is close to announcing his choice of the next Fed Chairman, from a shortlist of five candidates.

One option is to reappoint current Chair Janet Yellen. This would presumably see a continuation of the current stance on monetary policy, with a gradual, shallow hiking cycle, and rundown of the balance sheet in accordance with the Fed’s published plans. Reappointment of the existing Fed chair as administrations change has become standard practice. President Trump has suggested he is open to keeping Yellen but he is also unpredictable. Yellen has robustly defended the post financial crisis reforms which Trump wants to repeal. Being out of step with the President like this could harm her chances.

The other four options are apparently: Gary Cohn, Kevin Warsh, Jerome Powell and John Taylor.

Cohn has somewhat fallen from favour as a candidate lately. He lacks formal economic training but he would bring formidable financial acumen to the job. His chances seem to have faded followings his criticism of Trump’s response to the Charlottesville protests earlier this year.

Warsh is a former Fed Governor, and, not insignificantly, the son-in-law of a good friend of Trump’s. He has cultivated a hawkish reputation and is in favour of the Fed shrinking its balance sheet dramatically from where it currently is. There has recently been a significant backlash from a number of economists to his proposed candidacy, given that Warsh’s views on quantitative easing, fiscal policy, and the general state of the economy have largely been inaccurate.

Powell is also a former Fed governor, with a reputation as a centrist and with slightly more focus on financial deregulation.

John Taylor is a well-known macroeconomist. He is most well-known for the so-called Taylor Rule which helps central banks across the world set policy. However, he appears somewhat beholden to his own rule, and may not demonstrate the flexibility of thought or action required of the Fed chair.

There is perhaps an argument for a new candidate who could institute a change in regime to shock the economy into expecting a higher growth and inflation rate. But all of the other candidates would largely represent a continuation of the status quo or a move to higher rates more quickly. If Trump is adamant that he does want to replace Yellen, the next best candidate would probably by Powell as representing policy experience and no damaging changes to the Fed’s direction.

There is much to admire about the way Yellen has run the Fed. Most recently, she’s started the process of unravelling quantitative easing, which many thought would be a disaster, with aplomb. Meanwhile she has overseen a solid economic recovery. A broad swathe of economic ills have been laid at her door. Most are unjustified. However, her critics are vocal and this could be her undoing in a world where the loudest voice is often the one which catches the President’s ear.

Luke Bartholom 19 October
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