As you know, we’ve been pushing pretty hard for Trump to choose dark horse candidate Krusty the Clown as the next Fed Chair.
For the time being, Krusty isn’t the odds-on favorite:
And that’s a shame, because out of all those people, it’s clear that Krusty has the most in common with the President and as such, would be the best choice in terms of ensuring consistency. I mean Trump has himself plainly stated that the Fed is a political organization beholden to the President, so why not make sure the President and the Fed Chair are on the same page in terms of intellectual capacity and temperament?
The drama around the decision is high. You can cut the tension with a knife. And Trump is loving that. He’s turned this into a special edition of The Apprentice and he keeps teasing us that a decision is imminent:
TRUMP SAYS HE'S `VERY, VERY CLOSE' ON FED CHAIR DECISION
fingers crossed on Krusty… pic.twitter.com/HShLOoaND1
— Walter White (@heisenbergrpt) October 23, 2017
Here’s Deutsche Bank’s latest on this all-important choice:
It is very important to note that the market reaction will vary based on:
- What is priced in at the time of the announcement. For now, PredictIt suggests Powell is the clear favourite which will restrain the reaction were he chosen. Nonetheless the odds on Taylor are sufficiently high, that there would be some “it’s not Taylor impact” if Powell or Yellen is chosen as the next Fed Chair. The sharpest reaction would be if Taylor is chosen, but please see iv) below for why the most significant impact of a Taylor selection would be closer to the next cyclical downturn.
- The overall impact will be heavily influenced by market context. For example, currently Washington’s decisions on fiscal policy are creating a slightly favourable USD backdrop; and a positive US equities bias. The favourable US equity environ is providing little support for EM risk, given the uptick in US yields. A Powell or Yellen choice, may on the face of it be small USD negatives, but if the market still foresees progress on the fiscal front, any negative USD should disappear very quickly.
- Comments from the President raised the possibility of both Powell and Taylor on the board. In this instance, whoever is the Chair will be seen as the dominant player having outsized impact on overall decisions, and this will dominate the market impact. A Powell Chair -Taylor board member mix could add to greater dissension and therefore volatility in the medium-term. The initial reaction of a Powell Chair, Taylor on the board, would be a very muted form of the response expected if it was Powell as Chair and no Taylor at the Fed. A combination of Taylor (even if not Chair) and Quarles on the board would almost certainly add to the Fed becoming more rules based. In the initial instance such rules will be very lightly applied, not least because of uncertainties over major components like r-star and the output gap.
- Most important: the differences in policy approach between Taylor and other candidates will be more important when growth slows, than currently in the current upturn. In current circumstances it is expected that the Fed’s institutional depth will depersonalize some of the decision making, at least when growth is near trend. However, in a slowdown, it could make the world of difference how a Fed Chair approaches unorthodox policies. Given serious concerns that the near zero slower bound on rates will be tested in the next recession, the approach to QE (and Taylor’s views on “diminishing returns to QE”) could become enormously important. Similarly, Taylor or Warsh would represent a significant diminution in ‘the Greenspan put’. The market’s knowledge of this should immediately add to longer-dated implied volatility
And here’s DB’s updated cross-asset impact table:
But in the final analysis, maybe not even Krusty is the best choice, because as The New York Post writes, it could be that Trump should just name himself the head of the Fed…
President Trump should name himself to be head of the Federal Reserve.
Eliminate the middle man. Save on a salary. Cut to the nitty-gritty: The Fed is not going to do anything Wall Street or Washington doesn’t like, no matter who is the boss.
So pick the one guy who’s in charge of Washington (at least in his mind) and beholden to Wall Street. That one man is Donald J. Trump.
And this way, when Trump changes his mind about interest rates — too low when he was a mere candidate, yet doesn’t want them raised now that he’s president — he won’t have to explain his flip-flops.
It won’t only save money, it will also be fun.
As Federal Reserve chairman, Trump wouldn’t need the Fed’s Open Market Committee anymore. He could just tweet out his interest rate decisions — “No hike this month. Isn’t it great!?” — anytime, day or night.
The excitement would be palpable all over the world.
But mainly, by naming himself chairman of the Fed would end the pretense of its being an independent agency.
And Trump-naming-Trump would also put to rest the myth that the Federal Reserve is only concerned about economic growth and inflation, when the stock market is the primary concern.