Who Will Lead the Fed? A Look at Trump's Five Finalists

By WSJ Staff Features Dow Jones Newswires

President Donald Trump is considering five finalists to run the Federal Reserve and plans to announce his nominee before leaving for a trip to Asia on Nov. 3, a White House official said Tuesday. Mr. Trump is considering offering Fed Chairwoman Janet Yellen the chance to stay in the job after her current term as chief expires in February and is meeting with her Thursday. He also is considering nominating Gary Cohn, director of the National Economic Council; Fed governor and former Treasury Department official Jerome Powell; Stanford University economist and former Treasury official John Taylor; and former Fed governor Kevin Warsh.

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Yellen, the Continuity Candidate

Picking Ms. Yellen would signal confidence in her handling of central-bank policy and the economy, including her slow and cautious unwinding of the Fed's crisis-era stimulus policies. It also would follow the tradition in recent decades of a new president reappointing the incumbent Fed leader installed by a president of the other party.

Ms. Yellen, who became chairwoman in early 2014 when short-term interest rates were near zero, led the Fed to raise rates four times since late 2015 and to launch the process of shrinking the central bank's $4.2 trillion in bondholdings acquired to lower long-term rates. The Fed signaled in September it expects to keep lifting borrowing costs gradually through 2020. Meantime, the U.S. economy is growing at a steady if moderate pace, the unemployment rate fell to 4.2% in September, the lowest level since 2001, and U.S. financial markets have taken the Fed's policy moves in stride.

Gary Cohn, an Unknown on Monetary Policy

Mr. Cohn has been a central figure in the administration's efforts to roll back regulations and cut taxes, but has provided few public clues of what he thinks about monetary policy or the big economic issues the Fed leader faces.

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He has criticized forward guidance, or verbal efforts by central banks like the Fed to prepare markets for their envisioned policy path. Mr. Cohn said at an event in March 2016 that such measures have often confused markets.

Mr. Cohn joined Goldman Sachs as a metals trader in 1990 and became a partner in 1994. He served as Goldman's operating chief from 2006 until he joined the Trump administration earlier this year.

Mr. Trump said in July that Mr. Cohn was a front-runner for the job, but Mr. Cohn fell out of favor with Mr. Trump for criticizing his response to violence at a white supremacist rally in Charlottesville, Va., in August. However, Mr. Cohn has remained in the running.

Powell, Continuity on Rates but More Open to Deregulation

A Powell-led Fed likely would continue Ms. Yellen's slow approach to raising rates and reducing the bond portfolio very gradually, but have a lighter touch on financial regulation. During his five years at the Fed, Mr. Powell has been a reliable ally of Ms. Yellen. He has never dissented on a monetary policy vote and in speeches hasn't deviated far from the board's consensus.

But he has advocated loosening some of the banking rules included in the 2010 Dodd-Frank law, a position that meshes with Mr. Trump's deregulatory agenda. Mr. Powell has suggested softening the Volcker rule barring banks from using their own money to make risky bets, and easing some bank stress tests. He also has endorsed reviewing some of the supervisory duties imposed on the boards of directors of banks to prevent them from being burdened with "an ever-increasing checklist."

"More regulation is not the best answer to every problem," Mr. Powell said in a speech in early October.

Taylor, a Vocal Fed Critic

Mr. Taylor, a longtime adviser to Republican presidents and presidential candidates, has been an outspoken opponent of the Fed's easy-money policies adopted to stimulate the economy during and after the financial crisis. He is perhaps best known for his "Taylor Rule," which was first spelled out in 1993 and provides a mathematical formula to set interest rates. Central bankers have used the rule as a benchmark against which to measure their own policy, but they have been hesitant to bind themselves to it. The rule would have called for considerably higher interest rates than the Fed put in place in the years since the crisis. Mr. Taylor has spent the past few years calling for higher interest rates.

He has criticized the Fed's bond-buying programs, arguing that driving down longer-term bond yields would make lenders less likely to extend credit and hold down economic growth.

On fiscal policy, Mr. Taylor has advocated shrinking the federal deficit as a way to boost economic growth even in the aftermath of recessions. He has argued that reduced government spending would reduce the need for higher taxes in the future, prompting more private investment today.

Warsh, a Fed Critic With Crisis-Fighting Experience

Mr. Warsh, a former Morgan Stanley executive who served on the Fed board during the financial crisis, has positioned himself as a conservative proponent of tighter monetary policy. He has expressed skepticism of central-bank rate policy and communications, criticized its asset-purchase programs, and accused officials of "trying to fine-tune the economy."

In a December 2016 speech, Mr. Warsh criticized the Fed for straying from its mission of maintaining stable and low inflation. He chided the Fed for relying too heavily on short-term economic data when making policy decisions. "The Fed needs to stay out of politics, stick to its mission and reform its strategy, operation, communications and governance, and in so doing the weight and responsibility for the economy will have to be picked up by someone else," he said.

Mr. Warsh served as an economic adviser to President George W. Bush before joining the Fed in 2006. After the crisis began, Mr. Warsh was part of then-Fed Chairman Ben Bernanke's war room of officials who would brainstorm over ideas before Mr. Bernanke floated them with all Fed policy makers.

(END) Dow Jones Newswires

October 17, 2017 14:28 ET (18:28 GMT)