On September 29th, President Trump said that he would be announcing "in two or three weeks" his decision as to who will chair the Federal Reserve after Janet Yellen's current term expires in February. By our reckoning, even though in theory the president has until the end of the year to make his choice, we'll hear who's going to be in the top job by the end of next week. Whoever it is, we wish them luck ..... and if anyone was thinking that the position of Fed Chairman was somehow just the most high-profile representative of a committee-based, policy-making body, and therefore that the selection will not be hugely influential "market-wise", we would urge them to think again.
Up to five of the seven jobs on the Fed's board of Governors are, or will soon be, in need of new appointments. With concerns for the independence of the central bank being openly expressed given the opportunities Mr Trump has to fill key roles with new personnel, the choice of the next Chair has probably never been so crucial. We think it would be pretty safe to assume from his previous statements, and from his very nature, that central bank independence does not figure as highly on the president's agenda as some would like.
Mind you, as we've said before it's sometimes tough to work out what Mr Trump's preferences might be. In his election campaign he gave Janet Yellen some dreadful stick for presiding over a super-accommodative monetary policy of ultra-low rates and bond yields, even though the situation was largely inherited and the ability to roll back such measures was repeatedly postponed by events outside the Fed's control (she would argue). Since taking office however Mr Trump has presented himself as a "low rates kinda guy". One might be tempted to make the argument that such apparent inconsistency makes Fed independence from political interference even more desirable.
Beyond any policy differences, it wouldn't be going too far out on a limb to suggest that there might be considerable personal antagonism between Ms Yellen and Mr Trump, though of course neither would publicly admit to it (wait for the book). But remarkably, Ms Yellen is still in the betting to be reappointed to her current job for another term. According to some judges, not so long ago she was even vying for pole position. On balance, that would be be the preferred outcome for the markets. Continuity is always highly valued by investors but in addition the majority view would probably be that she's done a decent job in not the easiest of circumstances. There are always differing opinions within the Fed so total unanimity is not realistic, but she has managed to successfully bring the Fed's decision makers into a working consensus far more often than not, and to communicate its intentions to the market-place.
We wouldn't disagree with that, and if he was to reappoint her President Trump would certainly demonstrate an open-mindedness that would both surprise and please investors. Frankly though, we're just not convinced that he's got it in him to retain appointments of such influence inherited from the previous regime. Most crucially, Ms Yellen's stand against deregulation in the banking sector that she reiterated at Jackson Hole puts her at odds with the president in that key area, and after her slightly unexpected re-emergence near the front of the field, Ms Yellen has fallen back just as a new leader in the betting has emerged.
Kevin Warsh is an ex-banker (Morgan Stanley), an economic advisor to President (G.W.) Bush, a former Fed governor and now an academic in the field of economics at Stanford. On the subject of deregulation, his views are considerably closer to those of the president than those of Janet Yellen. His recent interview with Mr Trump sparked speculation that he was the president's favoured choice and call us cynical if you like, but the fact that Mr Warsh's father-in-law, Ronald Lauder of the Estee Lauder Corp, is a long-time associate of the Trump family won't hurt his chances any. (By the the way, what DID happen to Mr Trump's promise to drain the Washington swamp?).
That's not to say that Mr Warsh does not have talents -- he was the youngest ever governor, after all -- but if he gets the job he will certainly challenge staff at the Fed if they expect to continue down the same course as the current one. He's been critical of the Fed's continued unconventional policy (i.e ultra-easy) post-crisis, both when Ben Bernanke was Chairman and under Janet Yellen. Mr Bernanke found Mr Warsh a good man to have around when explaining the Fed's actions at the time of the crisis, but found his calls for turning off the taps before the economy had started to recover (as he saw it) more than a little exasperating.
From that we can deduce that Mr Warsh does have a preoccupation with inflation that the current regime don't all share, and he can be considered on the hawkish side. He might be tempted to tighten policy more quickly (by speeding up balance-sheet reduction if not through faster rate-hikes) and he would not be too bothered if resulting lower markets meant a more general tightening of financial conditions. Whilst he may agree with Mr Trump on regulation issues, he does value the independence of the Fed but believes that it should have a more hands-off approach . The last thing that he would promote it's the Fed's job to support asset valuations .
Also coming into contention with a late run is Jerome Powell, a current Fed governor with a Wall St resume and helpful Republican Party affiliations. Mr Powell's stance on policy is seen as very similar to Janet Yellen's, and the markets would like the continuity that his appointment would represent. Indeed, one could argue that the strongest point in his favour is that he's the closest thing to a Yellen-proxy out there, without actually BEING Janet Yellen.
The strong favourite for a long while was Mr Trump's chief economic advisor Gary Cohn, yet another of the ex-Goldman Sachs personnel in the White House. Sadly for Mr Cohn (assuming he would still want the job), his strong criticism of the president for failing to adequately condemn the role of white supremacists in Charlottesville seems to have put paid to his chances in one fell swoop -- this is not a president who reacts well to personal criticism.
So, how are we left ? There are other candidates, but since we're not even sure that Janet Yellen would want the job again even if it was offered it looks to us to be between Kevin Warsh and Jerome Powell. Mr Warsh's appointment would probably bring on a knee-jerk jump in yields of about 10 basis points on the 10yr US Treasury, according to Nomura, and the accession of Mr Powell would suggest a "no change" result, or even a small pull-back in relief. If the leader in the betting Kevin Warsh does get the nod, inevitably the rise in yields would prompt speculation that the important resistance above 2.60% on the 10yr Us Treasury will be broken and the way would be clear to 3.00% or higher.
Of course, that's what the bond bears said back in March when yields touched 2.62%, only to subsequently fall back again as low as 2.03%. With 10yr yields now at 2.35%, if a new trend is going to be established, Mr Warsh (if that's who it turns out to be)
will have to convince markets not only that his own hawkishness is for real, but that it's justified by economic fundamentals. We'll see .......