Janet Yellen will end an effective term as Fed chair. What’s next?

With Janet Yellen’s term as Federal Reserve chair coming to an end in February and given the central importance of the chair person’s role in both market perception and actual monetary policy, the pending announcement by President Trump of his choice to head up the Fed is being closely watched. Increasingly it appears as though, republican attorney and Obama Federal Reserve appointee, Jerome Powell has the edge to replace her. Mr. Powell has a long and distinguished history, in Washington D.C., going back to his time at the Treasury Department under President George H.W. Bush. More recently he quite effectively managed the Federal Reserve’s handling of the Treasury debt flash crash of 2014. He is considered non-partisan, deeply experienced, well respected and seasoned.

The question in many market participants minds is whether President Trump actually needs to replace Chair Yellen at all. Yellen is considered by many to be a protégé of sorts of former Fed Chair Ben Bernanke’s. By nearly every account, regardless of political persuasion and objectively speaking, Chair Yellen is looked upon as having done an outstanding job as Fed chair. Janet Yellen was given the task of running the Fed after Chair Bernanke’s last term came to an end.

Given her experience as governor while at the Fed during the Financial Crisis, Great Recession and stimulus that followed, and given that under her watch as chair, Fed monetary policy has effectively been focused on normalization and on balance sheet reduction, Janet Yellen will be difficult to replace.

In addition to handling the most challenging monetary backdrop in modern history with grace and effectiveness, while under her leadership the Federal Reserve managed to provide monetary stability, encourage economic growth, reduce unemployment all while keeping inflation well contained.

President Trump is not required to replace Janet Yellen but the odds are great that he will. The chair of the Federal Reserve serves at the appointment of the President and what hinders Yellen’s chances of being re-nominated by Trump is the simple fact that she was originally nominated by former President Obama. Though rather political and pedestrian in light of the importance of the position, that in and of itself is reason enough for a switch at the top, at least in Washington D.C.

If, as is widely expected, Jerome Powell is elevated to the Chair of the Fed, don’t look for any meaningful change in monetary course by the Fed or FOMC. In fact, Jerome Powell has acted to support Yellen’s monetary policy positions from the very outset of her assumption to the Chair. His non-partisan approach to policy has been such that his positions have been indistinguishable from hers in many respects.

Effectively, if Powell is nominated don’t expect any meaningful departure in policy from what we have gotten accustomed to from Yellen.

There have been other names bandied about for consideration. White House cabinet member Gary Cohn was considered a potential candidate in recent days but given the role he is expected to play in tax reform negotiations, it is more likely that he will remain at the White House. Also under consideration in recent days has been Kevin Warsh but given the lack of support he has received from cabinet member Mnuchin, his chances seem remote. Finally, Stanford University’s John Taylor is widely considered to be the most aligned with President Trump’s approach to growing the economy – in large part through reform.

Odds are that either Jerome Powell or John Taylor will be tapped on the shoulder in coming days with an official announcement by the President likely this week. In either case, I do not expect a significant departure from the policies that defined Chair Yellen’s very effective tenure.

Flickr photo: Tim Evanson