Musical (Fed) Chairs

Deidra 2016-11.jpg

by Deidra Krys-Rusoff
Senior Vice President

Week in Review

Treasury rates and the U.S. dollar climbed while U.S. equities are headed towards six straight weeks of gains. The market appears to be betting on the successful passing of a tax overhaul after the U.S. Senate approved a budget resolution. The bond market fluctuated and ended the week yielding around 2.37 percent, trading up from last week’s level of 2.27 percent.

Equity markets are poised to close at all-time highs, with the S&P 500 trading above 2,570 and the Dow Jones Industrial Index trading above 23,300. The U.S. dollar touched a three-month high today while the euro lost some steam as investors keep an eye on the political issues in Europe, namely Spain and Brexit.

Musical (Fed) Chairs

President Trump plans to announce his pick for the next Federal Reserve Chair by November 3 from a short list of finalists. This decision may be his most important to the financial markets to date, affecting both the economy and the markets. In the ultimate reality show, he has chosen five finalists for the job: Janet Yellen (current chair), Kevin Taylor, Jerome Powell, Kevin Warsh and Gary Cohn. President Trump hasn’t publicly announced favorites, but has declared “I have a great respect for them all.”

Janet Yellen
Dr. Yellen is currently serving as Chair of the Board of Governors of the Federal Reserve System. She has also served as Vice Chairwoman from 2010-2014. Chair Yellen has been considered dovish, promoting looser, more accommodating monetary policies which favor low interest rates. President Trump has previously accused Chair Yellen of holding interest rates low to help Democratic leaders, but has recently mentioned that he likes her low interest rate policies.

Jerome Powell
Mr. Powell is a former investment banker who has served as a member of the Federal Reserve Board of Governors since 2012. Powell is considered relatively dovish and is a candidate who would probably continue with Chair Yellen’s policy of a gradual interest rate increase. 

John Taylor
Dr. Taylor is a Stanford University economics professor famous for inventing the Taylor Rule, a formula that calculates the federal funds rate depending on the state of the economy. This mechanical rule would suggest that the Fed’s fund rate should currently be above 2 percent. Taylor is considered hawkish, promoting policy which cools inflation and economic activity and promotes stable prices.

Kevin Warsh
Mr. Warsh is a former attorney, investment banker and former member of the Federal Reserve Board of Governors (from 2006-2011). He has recently served on a business forum assembled by President Trump. Mr. Warsh is considered hawkish and has publicly argued for higher rates and financial deregulation.

Gary Cohn
Mr. Cohn currently serves as President Trump’s Director of the National Economic Council and is the former president of Goldman Sachs Group. Cohn has not commented on interest rates, but has spoken out strongly in favor of loosening financial regulations.

The bond market has been moving in reaction to rumors of which finalist President Trump is favoring this moment. If a hawkish-leaning candidate is rumored to be in the lead, the Treasury rates rise. Yields fall when a dovish leaning candidate seems to be at the head of the race. Hawk or dove, the next Fed chair will continue the job of striving for stable prices, maximum employment, and moderate long-term interest rates.

Takeaways for the Week:

  • President Trump will announce his choice for Federal Reserve Board Chair by November 3
  • Bond yields are fluctuating based upon which candidate President Trump is rumored to be favoring