Despite treating the decision-making process for Federal Reserve chair a bit like a reality show, Donald Trump, our chaos agent–in-chief, is playing it safe. The New York Times reports today that Trump is expected to choose Jerome Powell, who Bloomberg once described oh-so-tantalizingly as “the Federal Reserve’s lowest-profile governor.”
A Republican private equity millionaire and Treasury Department veteran from the staid George H.W. Bush years, Powell was nominated to his current seat on the central bank’s board in late 2011 by President Obama. Fed watchers expect that he would pursue more or less the same approach to monetary policy as the current chair, Janet Yellen, gradually raising interest rates and unwinding the bank’s swollen balance sheet while trying to cause minimal disruptions in the economy or financial markets. As one bank economist told the New York Times, “Our view is Powell is the G.O.P. version of Yellen.”
This is a bit of a relief. The head of the Fed arguably has more direct power over the health and direction of the economy than any other single person in government, and compared to some of the other candidates for the job, Powell seems far less likely to bring on disaster.
In an ideal world, Trump would have stuck with tradition and simply tapped Yellen for another term (her current one expires in February).
Presidents customarily reappoint Fed chairs so long as they’ve been competent, and Yellen is largely seen as having had a successful four years, carefully steering the central bank along a slow path to higher rates that has allowed the economy to gain strength over time. But while Trump liked her approach to policy—he called her “terrific”—Yellen had two main strikes against her. First, she’s a holdover from the Obama era. As such, Republicans in Congress have treated the first female Fed chair as a rhetorical punching bag for years, and likely wouldn’t have embraced her now. Second, and more substantively, the White House is interested in rolling back bank regulations written under Dodd-Frank. Yellen is a vocal defender of those rules, which the Fed has played a key role in drafting and enforcing, and said recently in a high profile speech that any changes to them should be “modest.”
Powell is more in line with the White House on that front. He’s called parts of Dodd-Frank “unnecessarily burdensome” and suggested dialing back the Volcker rule, which prohibits banks from trading purely for their own profit. He hasn’t endorsed Trump’s entire deregulatory agenda; after the Treasury Department issued a report listing ways to loosen financial rules, he called it a “mixed bag” and told Congress that it contained “some ideas that I would not support.” But given that Treasury Secretary Steve Mnuchin reportedly pushed Powell’s candidacy hard, he’s clearly a man the administration thinks it can work with when it comes to tweaking how Washington oversees Wall Street.
In short, Powell combines Yellen’s monetary policy instincts with a looser approach to regulation. That makes him a rational, low-risk choice for Trump—someone who will let the bull market that Trump likes to brag about keep running while giving bankers a bit more room on their leashes.
The same cannot be said for some of the others on Trump’s shortlist.
Aside from Yellen, the other leading contenders for chair were reported to be former Fed Board member Kevin Warsh and Stanford University economist John Taylor. (Gary Cohn, director of the White House’s National Economic Council, saw his chances evaporate after criticizing Trump for being too lax on white supremacists post-Charlottesville. Them’s the breaks.) Both Warsh and Taylor are committed ideological conservatives who spent the early years of the financial crisis recovery agitating for higher interest rates and predicting inflation just around the corner, then coming up with other excuses to hike when inflation failed to materialize. Warsh in particular had such a mania for hard money that he was still fretting about inflation the day after Lehman Brothers collapsed.
Given their past hawkishness, both Warsh and Taylor would have been somewhat strange picks for Trump, who likes to call himself a “low-interest rates” person. But each had key backers within the more orthodox trenches of the GOP. Warsh is a darling of ‘80s-style supply siders, who think he would mold the Fed’s policy to support the administration’s tax cuts and broader economic agenda. (So much for central bank independence.) Taylor, meanwhile, is the patron saint of conservatives who believe monetary policy should be conducted based on strict mathematical formulas. His “Taylor rule,” which he drew up back in 1993, would set interest rates about three-times higher than they are today. And though he says the formula shouldn’t be followed “mechanically,” Wall Street still assumes he’d nudge the Fed in a more hawkish direction. His fan club includes a number of Republican senators and Mike Pence.
In the end, though, barring any last minute change of heart, Trump might just understand that good central bankers tend to be pragmatists without strong ideological commitments to blind them in times of crisis. Or, alternatively, maybe he just gets that picking a longtime hawk for Fed chair is a bad idea when you really want a dove. If Powell does officially get the nod, it’ll be a reminder that when it comes to certain decisions, the one thing worse than a President Trump would be a President Pence.