Will Janet Yellen serve another term as Fed Chair?

Janet Yellen’s current term as Federal Reserve Chairperson will expire in February 2018. On Twitter, President Donald Trump stated that he would be announcing his choice for the next Fed Chair soon. The current list of candidates are said to include: 1) the current Fed Chair Janet Yellen, 2) current Federal Reserve Board Governor Jay Powell, 3) Stanford University Professor John Taylor, 4) former Federal Reserve Board Governor Kevin Warsh, and 5) Donald Trump’s current Director of the National Economic Council (NEC) Gary Cohn.

These candidates can be separated into three camps: a) steady as she goes, b) break from the past, and c) the fifth wheel. The fifth wheel, Gary Cohn, can be immediately eliminated from contention for two reasons – he is key to implementing Trump’s Tax Reform plan (per the president’s public statements), and he criticized Trump’s response to the protests in Charlottesville, Virginia .

The steady as she goes candidates are current Fed Chair Janet Yellen and Fed Governor Jay Powell. Both of these candidates could remain at the Fed, regardless of Trump’s selection of Chairman, as their terms as Fed Governors to not expire until 2024 and 2028, respectively. Both of these candidates are seen as “dovish” on inflation, as they prefer a gradual increase in the Federal Funds (interest) rate. Both of these candidates are holdovers from the Obama administration: Yellen was nominated as Fed Chairman by President Obama, and Powell was nominated as Fed Governor by President Obama.

The break from the past candidates are Stanford University Professor John Taylor, and former Fed Governor Kevin Warsh (also at Stanford). Both of these candidates have been sharply critical of the Federal Reserve’s handling of the financial crisis – in particular, the purchasing of billions of dollars of government bonds and other assets to increase the money supply and lower interest rates (quantitative easing). In addition, John Taylor is known for the “Taylor Rule,” which defines how interest rates should be set: add the inflation rate to the “neutral” (R-star) interest rate (the interest rate that keeps supply and demand equal).

If I were a betting man (which I am not), I would bet that President Trump would want to break from the past to put his own stamp of approval (influence?) on the Fed. This would mean either of the last two candidates discussed above, John Taylor or Kevin Warsh. And since Trump already asked the Republicans in Congress (by a show of hands), which person they would rather he select as the next Fed Chair – John Taylor or Jay Powell (they supported Taylor), my money (if I were to bet any) would be on John Taylor.

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