President Trump to Announce Fed Pick Next Week -- 2nd Update

By Kate Davidson and David Harrison Features Dow Jones Newswires

President Donald Trump said Friday he would announce his choice for the next leader of the U.S. central bank "sometime next week," and said he has "somebody very specific in mind."

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"It will be a person who hopefully will do a fantastic job," Mr. Trump said in a video posted to Instagram on Friday, adding, "I think everybody will be very impressed."

Mr. Trump was leaning toward tapping Fed governor Jerome Powell, who was going through the final stages of the White House vetting process, according to a person familiar with the matter.

Stanford University economics professor John Taylor was also under serious consideration, and Mr. Trump in an interview Wednesday said he was thinking of offering another term to Fed Chairwoman Janet Yellen.

White House officials caution that nothing is final until the president announces his choice. He is known for making spur-of-the-moment personnel decisions, and for changing his mind.

Mr. Trump has upended the usually staid selection process by openly weighing the pros and cons of various candidates and asking lawmakers, businesspeople and media personalities for their input. As the process drags on, contenders for the job have faced heightened scrutiny from detractors hoping to sway the president's choice.

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Conservatives who support Mr. Taylor's nomination have mobilized against Mr. Powell, a Republican who served in the George H.W. Bush administration, assailing him for supporting the Fed's easy-money policies during his five years at the Fed.

They also say Mr. Powell didn't do enough to oppose what they see as overly stringent financial rules the Fed imposed after the crisis, despite his recent public remarks that the Fed should rethink some postcrisis regulation. And they point to Mr. Powell's previous confirmation votes, when a significant number of Republicans opposed him, as reason for the White House to think twice about putting his name forward.

U.S. Rep. Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee, said Thursday he worried Mr. Powell wouldn't be aggressive enough in paring back the Fed's portfolio of assets purchased to spur the economy after the recession.

"I'm particularly concerned about how we effectively unwind this balance sheet, and John Taylor more than any other candidate is well positioned to do that," he said. "Jerome Powell, I don't know, but I have my concerns."

A Fed spokeswoman said Mr. Powell declined to comment.

Mr. Taylor, meanwhile, is facing questions about whether he would follow his own mathematical formula for setting interest rates -- dubbed the Taylor Rule -- if he becomes chairman. Under the rule, short-term interest rates would be around 3.5% now, compared with the Fed benchmark federal-funds rate's current range between 1% and 1.25%, according to Michael Feroli, chief U.S. economist at J.P. Morgan.

Mr. Taylor's supporters have said he wouldn't be so rigid as his arguments might suggest, with some saying he would be less likely than Mr. Powell to raise interest rates to curb inflation that could stem from GOP tax cuts.

Some Wall Street economists say uncertainty about what Mr. Taylor would do could rattle the markets.

A Taylor nomination would be "a volatility-inducing event," said Tom Porcelli, chief U.S. economist at RBC Capital Markets. Peter Hooper, chief economist at Deutsche Bank Securities said "there would be some negative reaction in the markets" if Mr. Taylor gets the nod.

If Mr. Taylor does deviate substantially from his own rule, "markets will be very interested in understanding if his reasons are politically motivated or based on economic fundamentals," said Torsten Slok, chief international economist for Deutsche Bank Securities. "This will be a big potential challenge for Fed communication."

Mr. Taylor, in an email, responded that in a 1993 paper he wrote that policy rules "cannot and should not be mechanically followed by policymakers" and he noted he had reiterated that at a recent Boston Fed conference.

Mr. Taylor was viewed as a possible successor to then-Chairman Alan Greenspan while serving four years as Treasury undersecretary for international affairs during the George W. Bush administration. But he drew criticism at the time for not responding aggressively enough to a financial crisis in Argentina. Staffers at the time also complained about low morale, The Wall Street Journal reported in 2002.

In the email, Mr. Taylor responded that his 2007 book describing his time at the Treasury "emphasizes the effective teamwork of the Treasury staff throughout the world."

The Stanford economist also faces criticism from the left-leaning Center for Popular Democracy's Fed Up campaign, which has urged the Fed to keep rates low and called on Mr. Trump to offer Ms. Yellen a second term as chairwoman. The group staged a protest Thursday night at a speech Mr. Taylor delivered at the University of Wisconsin-Madison, distributing fliers with bold print warning "John Taylor = Job Killer."

Meantime, several House Republicans sent a letter to the president Wednesday urging him not to pick Ms. Yellen. "Appointing a new chair is consistent with your message of transferring power from Washington, D.C., back to the American people," wrote Reps. Warren Davidson (R., Ohio), Ted Budd (R., N.C.) and Alex Mooney (R., W.Va.).

A Fed spokeswoman said Ms. Yellen declined to comment.

Mr. Trump also has considered former Fed governor Kevin Warsh and National Economic Council Director Gary Cohn for the Fed job, but their prospects have receded in recent weeks.

For decades, the selection of the next central-bank leader was fairly uneventful: President Ronald Reagan and each of his successors offered the incumbent chairman another term. They tended to offer few if any public clues about the contenders before announcing a nominee, who was usually confirmed with broad bipartisan support.

That changed in 2014, when a group of Democratic senators publicly urged President Barack Obama to nominate then-Fed Vice Chairwoman Yellen to the top post. Another contender for the job, former Treasury Secretary Lawrence Summers, eventually withdrew from consideration.

The current frenzy over the Fed selection reflects the increasingly polarized political environment as well as the central bank's higher public profile since the financial crisis.

The Fed chairman is "the most important economic policy maker arguably in the world, so I think it's fair to know who believes what and what their views on monetary policy are," said Sarah Binder, a Brookings Institution senior fellow and co-author of a recent book on the Fed. "One might wish for a less circus-like and more disciplined process, but that's not the president we have."

Peter Nicholas contributed to this article.

Write to Kate Davidson at kate.davidson@wsj.com and David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

October 27, 2017 18:22 ET (22:22 GMT)