The Next Fed Chair

A country’s central bank plays an important role in providing financial regulation and overseeing monetary policy.  The person at the helm of the central bank spends a lot of time in the spotlight and is essential in guiding the country through economic cycles.  Janet Yellen’s four-year term as the Chair of the US Federal Reserve System (the “Fed”), our country’s central bank, is coming to a close.  Yellen’s term ends in February and the decision for who will head the Fed next will be made in the next week.  While the Fed is independent of the political system, the Chair is appointed by the President.

As we draw close to President Trump’s decision for Fed Chair three main contenders remain: Jerome Powell, John Taylor and the incumbent Janet Yellen.  Jerome Powell is a current Fed Board of Governors member and a former investment banker.  Mr. Powell filled an empty seat on the Board of Governors in May 2012 and was reappointed in June 2014 for a term that ends in 2028.  John Taylor is a professor of economics at Stanford University but is definitely not on the outside of politics.  Mr. Taylor has served as a member of the President’s Council of Economic Advisors during the George H.W. Bush era and as the Under Secretary of the Treasury for International Affairs during the first term of President George W. Bush.  Taylor even served as a Senior Economist at the Council of Economic Advisors during the Ford and Carter Administrations.  Neither of these gentlemen are strangers to monetary policy and are threatening to Yellen’s Chair position.

Trump has said he will make his decision by November 3rd.  While Yellen has made her case before the President to maintain her role, a reappointment by Trump of the first woman leader of the U.S. central bank would be against Republican support.  As evidenced by frequent tweets, Trump has enjoyed the domestic equity performance this year, which could be attributed to Fed policy and plays in favor of a Yellen reappointment.  However, he is not afraid to make changes and he believes both Powell and Taylor to be solid choices.

So why does all of this matter?  Not only does the President need to have confidence in the Fed Chair but it is imperative for continued economic growth as our country continues to slowly step away from the loose money policies and unprecedented inflated balance sheet.  Specifically, if the Fed were to raise short-term borrowing rates too quickly or hastily unwind their inflated balance sheet it could cause inflation concerns or result in a negative reaction by the market.  It could also impact you personally.  Loose monetary policy has helped support the economic recovery.  Have you noticed all of the home mortgage refinancing or perhaps the new developments?  You can thank low interest rates and cheap financing.  An active Fed that is responsive to economic conditions will provide an environment for a quicker and more stable recovery in times of financial distress.

The market and economists are listening closely for President Trump’s announcement of the next Fed Chair.  The decision is imminent.  We have found ourselves in an unprecedented scenario and financial markets are delicate ecosystems that tend to react abruptly to change and uncertainty.  Whoever is appointed will inherit, or maintain charge of, historically low interest rates, loose monetary policy and the Fed’s $4.5 trillion balance sheet.