We have arrived at the million dollar question. The White House is rumored to have narrowed down its search for the next Chair of the Federal Reserve to five candidates: Current Board of Governor Jerome Powell, Former Board of Governor Kevin Warsh, Current Trump-Advisor and Director of the National Economic Council Gary Cohn, academic economist John Taylor of “The Taylor Rule” and Current Fed Chair Janet Yellen. Who will it be?
By polling the audience with our first lifeline, we can see that the betting odds and the media say Powell and Taylor are the top contenders. Nevertheless, the situation is still fluid, and instead of pontificating on the inner workings of the White House or re-hashing what is already available in the financial news, I want to provide insight and comparisons not seen elsewhere. By putting the top contenders side-by-side, we notice a few things:
Assuming that each candidate has equal odds, there is a 60% or greater chance that the next Fed Chair will:
This comparison puts a few candidates at odds with the rest. First, Gary Cohn is in the minority due to his lack of Fed experience, non-Ivy league education and democratic registration. He is also still in the midst of his big project for the Trump Administration: tax reform. Second, Chair Yellen is a Democrat who lacks private sector finance experience and spent her career in academia. On the other hand, her track record as Chair has been very successful. She has been able to increase rates off the zero-lower bound and begin the process of shrinking the balance sheet, all while keeping the stock market elevated and the real economy away from recession. Taylor is also somewhat in the minority as a trained economist with no private sector finance experience or prior roles at the Fed.
Two remaining candidates, Jerome Powell and Kevin Warsh, are similar in many ways. Both are Republicans who have served as Fed governors, have Ivy League educations, law backgrounds, and private sector finance experience. Though they look extraordinarily similar on paper, their views on monetary policy are quite different and the implications for the market will vary.
To get a little more detail, I decided to use my second lifeline and phone “my friend” Ben Bernanke. In Ben Bernanke’s book, “The Courage to Act”, every candidate on Trump’s short list, with the exception of Cohn, is mentioned, and we can glean key insights not found elsewhere.
Kevin Warsh: Bernanke speaks frequently and highly of Warsh in his book. He was the youngest Board of Governor ever to serve and joined within a month of Bernanke being sworn in. Bernanke viewed Warsh as having “superb political judgment and particularly good connections among republican lawmakers.” In his time at the Fed, Warsh never dissented against an FOMC decision, including those promoting QE1 and QE2. During the debate over the latter, however, he did express reservations and published an op-ed in the Wall Street Journal warning of the risks of a large balance sheet and urging fiscal policy makers to take the lead with supply side solutions to improve the economic backdrop. Nevertheless, despite policy differences, Bernanke said Warsh always participated “candidly and constructively” and “as a team player in deliberations”. These observations could be key for understanding how Warsh may conduct himself if he found his way back to the Fed.
Jerome “Jay” Powell: Bernanke also wrote about Powell who was nominated to the Board of Governors in May 2012 along with Jeremy Stein. The two were paired together as a Democrat (Stein) and Republican (Powell) in order to get Senate approval. In regards to his political views, Bernanke called him Republican but “no Tea Partyer” and wrote he had a “reputation as a moderate and a consensus builder”. Similar to Warsh, Powell was hesitant to endorse QE3 because of financial stability risks but ultimately determined the need to support the struggling economy was more imperative. Also like Warsh, Powell has never dissented at a meeting, which I think is an important detail that is sometimes overlooked. Although new leaders often desire to change the strategy, both candidates have shown respect for the current operating style of the Fed and the consensus-building nature of the organization.
Bernanke discusses Taylor as well, specifically referencing his famous research and advocacy for rule-based policy prescriptions. Both Yellen and Bernanke have argued against formalizing a policy rule as impractical and imprudent for policymakers; though both acknowledge that these policy rules are monitored and studied by economists at the Board.
Unfortunately, knowing how these candidates have acted in the past is not necessarily a window to the future. Those who have been more vocal could moderate their tone if they get the role. Even Taylor, whose own rule suggests a Fed Funds rate target dramatically higher than the current one, has recently written about the applications of discretion and evolution within a rule-based framework.
However, despite some potential moderation, both Warsh and Taylor have previously expressed strong views about running the Fed, which differ significantly from the current Chair and would seem to imply higher rates and a more hawkish bias. In an op-ed in January, Warsh argued, “the Fed should establish an inflation objective of around 1% to 2%, with a band of acceptable outcomes, and should adjust monetary policy only when deviations from its employment and inflation objectives are readily observable and significant”. He also states in the same article, “the Fed should assess monetary policy by examining the business cycle and the financial cycle. Continued quantitative easing—which Fed leaders praise unabashedly—increases the value of financial assets like stocks, while doing little to bolster the real economy”.
On the other side of the spectrum, Yellen and Powell are more likely to reflect a continuation of the existing playbook. Powell could make small changes on the edges, particularly in regards to the de-regulatory agenda, but is unlikely to alter the existing monetary policy framework. At this point, if I had to use my final lifeline and narrow it down to 50/50, I would suggest that Warsh and Powell are the two most likely candidates.
Is that my final answer? Unfortunately it’s impossible to be certain who the next Fed Chair will be! However, one interesting side note is that both the Chair and Vice Chair positions are up for grabs. If Trump likes all of these potential nominees as much as he says, there are a number of iterations where any of the five candidates takes influential positions at the Federal Reserve. All we can do is wait for a decision to be made.
 Page 426, “The Courage to Act” by Ben Bernanke
 Page 491, “The Courage to Act” by Ben Bernanke
 Page 540, “The Courage to Act” by Ben Bernanke