Trump’s choice for Federal Reserve’s top post could significantly impact the U.S. economy

This should be read in the context of Larry Fink, the CEO of Blackstone, the largest asset manager in the world, saying the warning signs of the U.S. economy are getting darker.

In what is likely to be a bid to appease conservative’s hunger for change and reassure the markets, U.S. President Donald Trump is weighing his options for the central bank’s top two posts; nominees include Jerome Powell and Stanford University economist John Taylor.

Federal Reserve’s chairman Janet Yellen is set to retire at the expiry of her term in February 2018. The Fed’s vice chair post also lies vacant since Stanley Fischer retired this month.

Its very likely that either Taylor or Powell are likely to take up either of the two posts.

“That is something that is under consideration, but he hasn’t ruled out a number of options. He’ll have an announcement on that soon, in the coming days,” said White House spokeswoman Sarah Sanders.

If Powell were to assume the chair vacated by Yellen, it would provide a continuity to Yellen’s gradual approach of raising interest rates. A continuity in monetary policy is what investors are craving for.

However if Taylor were to succeed Yellen, it would be a feather in the cap of Republicans since they have long felt that Yellen’s monetary policy has been rather loose. While Taylor has backed an overhaul of the Fed, his monetary policy is more rule-oriented.

“I think Powell might be the safer pick insofar as we know what we’re getting,” said Michael Feroli, chief U.S. economist at J.P. Morgan Chase. “He’s a guy who obviously knows the Fed culture, how the (policy-setting) committee operates, so for some of those soft skills we know he would be effective.”

Powell subscribes to Yellen’s monetary policy of keeping a tight job market since this will eventually push up wages and ease the worries of low inflation.

Taylor has spent the last 20 years refining and advocating a wider use of a rule that tries to determine where interest rates ought to be, given certain conditions of inflation and the broader economy. In essence, his rule implies that interest rates should be higher than they are now.

Mounting a staunch defense of the tools used by the Feds to fight a sharp downturn in economic conditions that were triggered by the 2007-2009 financial crisis, Yellen said there was a risk of another crisis in which those “unconventional policies” may be needed again.

It is unclear whether Trump, who has criticized Yellen’s stewardship but also said on several occasions that he preferred rates to stay low, wants to dramatically alter the Fed’s direction.

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