Fed Chair Discussions: Cohn, Yellen, Warsh, and Others

President Trump has continued to talk about whom he might nominate to become the next Fed Chair following  Yellen’s tenure as Chair, which ends February 2018. (We have previously written about the principles we  expect will guide Trump’s choice of nominee for Chair, about what we would expect if Quarles were  nominated as Vice Chair for Supervision, on his nomination hearing, and on the potential nomination of Marvin  Goodfriend.) 

In terms of what Trump wants from monetary policy, the answer remains low rates. Trump confirmed this in a recent interview, in which he reaffirmed his preference for low-interest rates and a weaker dollar.1 

I do like low-interest rates. I mean, you know, I’m not making that a big secret. I think low interest rates are good. I like a dollar that’s not too strong. I mean, I’ve seen strong dollars. And frankly, other than the fact that it sounds good, lots of bad things happen with a strong dollar. 

We continue to assume that Trump’s choices for Fed Chair and for other Board positions will not result in substantially different monetary policy compared to what would be the case if the current Committee were making the decisions. That assumption will be reconsidered as we learn more, particularly if someone other than Cohn or Yellen is nominated to be Chair, but we are comfortable with it for now. In any case, a new  Chair, especially if not a respected economist, likely won’t immediately have the intellectual credibility to lead the FOMC and therefore won’t be able to immediately shift the course of monetary policy. Regional Federal  Reserve Bank presidents, as well as pre-Trump Federal Reserve Board governors, provide continuity in policy,  especially at a time when a new President appoints a Chair and otherwise alters the composition of the Board. 

Dallas Fed President Kaplan recently argued that a Fed Chair must “stand on their own two feet” to develop a consensus on the FOMC. As such, he wanted to see an “expert person that can analyze the economy and have views on monetary policy that are respected…The reason that’s so critical is the second part of the  job—which is they’ve got to be able to mobilize a consensus, forge a consensus among presidents and  governors.” Fed Chairs have traditionally been doctorate holders if not academics (for example, Greenspan,  Bernanke, and Yellen). If the nominee is not a highly respected economist, we see the most likely contenders as those who come from a private-sector financial services background. In addition, while decisionmaking has become more consensus-oriented under Bernanke and Yellen, during their tenures the Chair was seen as more than “first among equals,” as someone who also shapes the consensus.  

Timing 

As for the timing of an announcement, Trump recently said, “sometime by the end of the year.” We take that to be late in the year. After all, there are many other policy issues to resolve that will demand the full attention  

1 Full transcript: Trump’s Wall Street Journal interview: The president sat down with the Journal’s editor-in-chief Gerard Baker in the  Oval Office on July 25. By JOSH DAWSEY and HADAS GOLD 08/01/2017. 

of the President and his advisers: Passing a budget to prevent a government shutdown and raising the debt ceiling to prevent default–not to mention moving forward on tax reform.2 

The Leading Contenders: 

As we consider contenders, we should keep in mind that Trump won’t nominate someone he knows won’t accept the nomination. So we also have to take into account the likelihood that a potential nominee would accept the nomination if it were offered. Trump has clearly singled out Gary Cohn and Janet Yellen as leading  candidates, with others “in the mix.” 

Gary Cohn: 45% 

The market appears to see Gary Cohn as the leading candidate for Fed Chair. Reports indicate that both the  President and the more moderate camp at the White House see Cohn as more than capable of being Fed  Chair. 

Some believe that Cohn as Chair would portend an extended era of dovish interest rate policy. This view may be founded on the perception that Cohn would be loyal to Trump’s 3%-growth goal, though this is unlikely to the case. And in any case, Cohn most likely understands that monetary policy cannot raise average growth rates. More informative of where he is on the dovish-hawkish spectrum are his remarks in 2015 on the first-rate hike in this hiking cycle: “no legitimate argument to raise rates without inflation being close to—or having  some inkling that it’s approaching—2 percent.” In addition, in his current role as Director of the National  Economic Council, after the most recent employment report, he revealed that he thought “there is some slack in the labor market. I think we can get the participation rate higher.” An objective of the FOMC does indeed seem to be to promote a still-tighter labor market to raise the participation rate. Still, we expect that, while he would fall on the dovish side of the dove-hawk spectrum among FOMC participants, he would not likely be more dovish than Yellen! 

Cohn also wanted to see more wage inflation, which is in line with the thinking of most FOMC participants,  not just the doves:  

On a 12-month [basis], we’re two and a half [percent], the one month was three-tenths of a  percent. So the one month is annualizing higher than the 12 months, which is interesting news to us. We spent time this morning discussing what that means if that’s a new trend.  We would obviously like to see some wage inflation in the system.  

However, Trump, given the departures from his team of advisers and the apparent chaos inside the Trump  White House, might see Cohn more and more as an indispensable resource given the urgency of some major policy initiatives coming up (such as tax reform and the debt ceiling).  

On the other hand, given that Cohn is clearly a part of the more moderate faction within the White House (he has earned the derogatory moniker “Globalist Gary”), others would gladly see Cohn doing less harm at the  Fed than he would at the White House. But it nevertheless seems clear that Cohn at this point is more useful to Trump at the White House than he would be at the Fed. 

Perhaps surprisingly, at least two current FOMC members have praised Cohn’s candidacy publicly, blunting concerns that Cohn somehow does not command the respect of current policymakers. Current New York Fed  President Dudley recently commented on Cohn’s candidacy: “I think Gary is a reasonable candidate. He knows  

2 We note that Yellen was officially nominated October 9, 2013; her nomination hearing was held November 14, 2013; the Senate voted for cloture December 20, 2013; and she was confirmed as Chair January 6, 2014. Yellen, of course, was already a sitting Governor when she was nominated for Chair. We don’t have any recent experience with someone outside the Fed, like Cohn, being nominated and confirmed straight to Chair. If there are concerns about the confirmation process, perhaps this bolsters the case for a safe choice like Powell, who has been confirmed twice as Governor.

a lot about financial markets. He knows a lot about the financial system. I don’t think you have to have a Ph.D. in Economics, which I have, to be a Chair of the Fed or Governor or a President of one of the Federal Reserve  Banks. I think it’s important to have a Committee that has diversity. That has different backgrounds and  perspectives.” Dudley declined to comment on any other candidate.  

Likewise, current Fed Vice Chairman Fischer said he likes Cohn. He explicitly said he wasn’t worried about  Cohn not being an economist, arguing that “the chairman of an institution such as the Fed, one of the primary  things he needs is the ability to judge the advice he is getting.” Fischer also said re-nominating Yellen would  be an “excellent choice,” praising her for making the tightening process “sedate”: “She has done it very  well.” As for his own re-appointment, he noted that “I keep saying to myself, ‘You don’t actually have  anything to decide.’” 

Trump, while noting that Cohn is “certainly” in the mix, appears to doubt whether Cohn would want to be to  Fed Chair over driving policy at the White House. 

I actually think he likes what he’s doing right now…Gary certainly would be in the mix. I just don’t know if he’d like – this is off the record – if he wants to sit down. Interest rates will be moving up one-eighth of a point…And then you leave. By the way, then the market crashes and it goes through the roof…I don’t know that Gary would want it. I think Gary loves what he’s doing, you know, and he’s doing a very good job.  

Numerous reports indicate that Cohn would be interested in becoming Fed Chair, although in public he has been careful not to actively campaign for the role. The narrow focus and slower pace of the Fed, at least when compared with the wide-ranging policies of the White House, might not be appealing. But the position of Fed Chair is prestigious, and where else would he want to go if he left the White House? Probably not  CNN! On balance, we see him as much more likely to accept the nomination, if offered it, than Yellen would be. Indeed, he has another advantage: He might nominate himself!  

A newer consideration, but certainly one that has been building for some time, is that he might be looking for the opportunity to leave the Trump administration, as his confidence in and respect for Trump have likely been diminishing, potentially along with his reputation, and more so after recent events. It may be time to get out of the White House. But if he has any desire to get the nod for Fed Chair, he must stay in his current role until a nomination is made. And, in any case, accepting the job at the Fed may be a more attractive way of extracting himself from the administration than resigning outright. 

The nomination process might prove to be a significant hurdle for Cohn’s candidacy. In our view, that is one reason 40% seems reasonable for the probability of Cohn being the next Chair. It might not be a dealbreaker for him being nominated, since Trump has not shied away from making nominations and hires with similar optics issues (including of course Cohn himself already). Cohn’s Goldman Sachs experience may weigh against him in the confirmation process and could reduce the likelihood of him being nominated if the optics are seen as too unfavorable. (Keep in mind that Cohn is a registered Democrat.) The growing number of ex 

Goldman employees on the FOMC would be quite apparent: The cohort currently includes Presidents Dudley,  Kashkari, and Kaplan.  

But if Trump opted to nominate Cohn, we would expect Cohn to be confirmed. Senators such as Shelby  (Cohn would be “excellent”) and Crapo expressed their strong support immediately after Cohn’s name was first floated. Crapo noted: “he’s got the skillset and clearly he understands the issues in a way that I think  would help for us to have.” Hensarling (House Financial Services Chairman) described Cohn as “an incredibly  smart individual who has served the president well.”

Janet Yellen: 15% 

The potential for her nomination has of course been boosted by Trump’s sharp reversal (since his campaigning days) of his views on Yellen. He now respects her! He now says: 

She is in the running to stay…she is in the running, absolutely. I like her. I like her demeanor.  I think she’s done a good job. I’d like to see rates stay low. She’s always been – you know,  she’s historically been a low-interest-rate person, a believer.  

The lower probability for Yellen reflects our view that she is both less likely to be nominated and, especially,  less likely to accept a nomination. 

We have long argued that, from the perspective of macroeconomic outcomes, Yellen stands out as the best Fed Chair for Trump. She would likely deliver the dovish, low-rate policy that is expected to promote above-trend growth over most of the period through 2019 and a declining unemployment rate to well below (a still declining) estimated NAIRU, taking a modest risk of overshooting the 2% objective. That wouldn’t fulfill  

Trump’s dream of sustained 3% growth, but who could deliver on that anyway? Of course, it’s easy to be a low-rate person in a world with a very low long-run NAIRU and even lower current NAIRU. Who isn’t? (Well,  other than John Taylor!) 

And she has played her part in keeping the door open—not difficult for her—by not overtly criticizing the  Trump Administration while continuing to express unchanged views about what she seems as economic realities (or at least strong likelihoods), for example, the sustainable rate of growth ahead, certainly over the next several years. More importantly, she has demonstrated that she can corral the FOMC into a consistent front and can keep a lid on hawkish opposition. Among all candidates, she would obviously offer the most continuity at the Fed.  

But the nomination process is, of course, also strongly affected by political factors. Senate Democrats would generally be open to Yellen’s re-nomination. (Senator Brown has expressed such a sentiment, for example.)  But re-nominating an avowed Democrat and social liberal (who was originally nominated by President Obama)  might be anathema to Republicans who wish to staff key economic institutions with Republican leaders. This is particularly relevant considering Republicans’ interest in easing financial regulation and the role the Board plays in implementing regulatory policy. However, the more-amicable tone exhibited by Congressional  Republicans during the most recent semiannual monetary policy testimony in July, disagreements on monetary policy notwithstanding, could mean that opposition to a Trump re-nomination of Yellen might be more tempered than we originally thought. 

However, even if Trump would like to re-nominate Yellen, we suspect that she might not be particularly keen on leading the Fed for another four years, especially with a Trump administration in the White House and surrounded by Trump nominees on the Board. We see the chance of Yellen of serving as Chair for another term as 15%, much less than that of Cohn. 

In the Mix: 40% 

Trump said “there are two or three” candidates, other than Yellen and Cohn. There have been quite a few other names floated. There has been some speculation about two Republicans, including former Fed governors in particular. 

Kevin Warsh 

Warsh, a former Fed governor, is one of the other candidates believed to be in the running, even though recently there has been less news about Trump’s interest in nominating him. More to the point, Trump declined to comment on Warsh when prompted by the WSJ interviewer, which contrasted with his glowing responses when asked about Yellen and Cohn. Trump reportedly saw Warsh as possibly being too young for this role.  (Warsh is 47; Cohn is 56.) That sent Warsh’s stock lower! 

Still, an important plus for him is that, unlike Cohn and Yellen, Warsh is a Republican. Although he is currently at Stanford, he is not an academic and, in any event, he is with the conservative Hoover Institute. He has a  financial industry background and was a Fed governor, so he knows the system well. He has been critical of the FOMC’s policy, and his critique is consistent with what has been the traditional Republican perspective.  

If he were nominated, Warsh’s confirmation process would likely be less problematic than that of Cohn.  Warsh’s experience at Morgan Stanley in investment banking would not pose as serious an image problem because Warsh has been at the Fed and at Stanford since then, and Goldman Sachs is a brand that is much more politically toxic than Morgan Stanley. 

Warsh could be more hawkish than Trump would prefer. He did appear to campaign for the job last month,  though interestingly he did so by co-authoring an op-ed with two other potential candidates, John Taylor and  Glenn Hubbard. Their commentary was likely music to the ears of Trump, offering comprehensive economic policy reforms to achieve 3-percent growth and thus supporting this as at least a potential outcome of those reforms.3 Without delving into the merits of their argument, we saw this paper as a signal to Trump, his team,  and pundits, that the authors would be open to accommodating faster growth. But they all know well, and the op-ed reflected this, that boosting long-run growth is about fiscal, not monetary, policy. In that respect,  Hubbard and Taylor already had their chances in President George W. Bush’s administration.  

We expect Warsh would jump at the opportunity to be Fed Chair; we see him having a higher propensity to accept the nomination than Yellen and even Cohn. 

John Taylor 

Taylor increased his stock among Congressional Republicans, at least in the House, by testifying in favor of virtually every reform of the Fed they have proposed. Their support for Taylor is shown in the fact that they have singled out the Taylor rule as the benchmark in proposals to require the FOMC to make policy following a policy rule. Beyond that, Taylor’s credentials are that he is one of the most respected Republican economists, who has spent much of his career directly focused on monetary policy strategy

A downer for Taylor’s candidacy is that he is not a low-rate person, and even questioned whether the real neutral rate has declined. Frankly, as we said many years ago, he is pretty rigid in sticking to the precise specification of a Taylor rule he initially wrote down! His rule prescribed a much earlier lift-off and today prescribes a much higher funds rate. 

Taylor would, of course, also jump at the opportunity to be Fed Chair. 

Jay Powell 

Frankly, we’re a bit surprised that Powell’s name hasn’t come up more. Nominating Powell would make a lot of sense. He is a Republican and has an impressive work history, including being Fed governor and high-level experience in the private sector. He would be a consensus builder and easy for the nomination process. 

Glenn Hubbard and Rich Clarida 

They have been rarely mentioned. We mention them because they are both Republicans, highly respected economists, and would, in our view, each make excellent Chairs. 

3 On The Prospects For Higher Economic Growth, by John F. Cogan, R. Glenn Hubbard, John B. Taylor, Kevin Warsh, Tuesday, July 18,  2017.

Other 

We are offering predictions of who an unpredictable president might nominate to be the next chair. The  “other” category features a type rather than a name or name: Someone whose views are grounded in real-world experience, not shaped in an ivory tower. Rich, of course. Probably plays golf, even with Trump. A  respected executive in the financial community. Like Gary Cohn, but a Republican.

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