“[Yellen] is not a Republican. When her time is up, I would most likely replace her because of the fact that I think it would be appropriate.” “[Yellen] is a low-interest-rate person, she’s always been a low-interest-rate person, and let’s be honest, I’m a low-interest-rate person.” ~Donald J. Trump, CNBC Interview, May 5, 2016
With Janet Yellen’s term ending in February 2018, the sweepstakes for Federal Reserve (Fed) Chair is heating up. The choice is inescapably political.
Accordingly, previous presidents have prioritized political affiliation when making their selections. We are inclined to take Trump’s mention of Yellen’s political party as intentional and in line with recent history. Let’s not forget that Yellen served as the Chair of the Council of Economic Advisers under President Bill Clinton, so her affiliation with the Democratic Party is hardly a secret.
The emphasis on political party is not all that surprising, given how consequential Fed policy can be for electoral outcomes. Any newly elected president will do everything in their power to boost job growth and raise asset prices, and President Trump is no different in this respect. However, the emphasis on low interest rates may be especially important for President Trump, as maintaining low interest rates would appear to promote two of his priorities: infrastructure and manufacturing.
Low domestic interest rates are commonly associated with a weaker US dollar. Granted, the relationship is far from mechanical—it depends on the relative position of US interest rates to foreign interest rates, and is subject to important caveats (for example, the US dollar has tended to appreciate during financial crises, even though interest rates have been low). Caveats aside, a weaker US dollar is very likely to be good for US manufacturing, as it unambiguously improves the competitiveness of US workers and products. Moreover, because it can be framed as a domestic issue, having low interest rates may be less likely to spark retaliation from our trading partners. This makes having low interest rates a somewhat less risky path to improved competitiveness, as opposed to tariffs, which are inherently international in nature and would be more likely to lead to retaliation. While President Trump certainly cannot directly control the value of the US dollar, he can and likely will exert indirect influence through his pick for Fed chair, and we think this will be an important consideration.
Following the above reasoning, we have trouble imagining the appeal of a number of frequently mentioned candidates. Our highest-conviction view is that Trump is unlikely to choose any economist who has been advocating for higher interest rates (e.g., John Taylor), regardless of political party or past experience. Among the broader list of Republican candidates, a number of them have taken principled stands on certain issues such as the size of the balance sheet (e.g., Kevin Warsh) or the future of Fed communications (e.g., Glenn Hubbard). While interesting and useful, these issues are unlikely to be deciding factors for President Trump, who is more likely to focus on interest-rate policy, where neither of these candidates have expressed a clear view.
Another alternative is that Trump could reappoint Janet Yellen. Trump has hinted as much a few times subsequent to becoming President. Yellen has the advantage of clearly fulfilling the “low-interest-rate person” part of Trump’s criteria, which we suspect is the more important of the two. But she falls short on the “Republican” part. While not a bad choice, President Trump may think he can do better than Yellen and look for somebody who fits both his criteria. Gary Cohn has a similar issue, in so far as his affiliation with the Republican Party has been, at best, opportunistic, and he may not be viewed as a reliable ally for President Trump.
With most of the frequently mentioned candidates having clear drawbacks, Trump may extend his search somewhat. One person that may fit both criteria is Jerome Powell. Mr. Powell’s low-interest-rate credentials are intact. He is currently serving on the Fed Board, and over the last five years has consistently voted with the Fed majority to maintain accommodative policy. Mr. Powell is also a Republican. Mr. Powell worked in the Treasury Department under President George W. Bush, and during his confirmation proceedings his Republican Party affiliation was emphasized in an effort to attract votes from Republican senators. Unlike all of the other candidates currently being mentioned, there is little question that Mr. Powell is a Republican, low-interest-rate person. Of course, it remains to be seen whether or not Mr. Powell will be President Trump’s Republican, low-interest-rate Fed Chair.
John L. Bellows, PhD, is a Portfolio Manager and Research Analyst with Western Asset.
Chairs of the Federal Reserve (1935 – 2017)
Source: St Louis Fed, NY Times, Western Asset. Number of years have been rounded up.