Who is the hottest Fed chairman candidate?

According to White House officials, President Donald Trump has narrowed his search for the next Federal Reserve chairman to five final candidates. Trump will decide about the Fed chair nomination before his Asian trip begins on November 3.

Trump's pool of Fed chairman candidates includes current chair Janet Yellen, current Federal Reserve governor Jerome Powell, the National Economic Council director Gary Cohn, former Federal Reserve governor Kevin Warsh and Stanford University economist John Taylor.

Yellen losing leading position

Trump is saying that he likes all of the candidates, but the chances are uneven. Trump had been criticizing current Federal Reserve chair Janet Yellen fiercely during his presidential campaign and although he turned positive saying she is doing a great job recently, she is the last to hold talks with Trump this Thursday, completing the list of Trump’s interviews.

When a website Predictit last time examined the chances of each of the candidate four weeks ago, Yellen was leading the poll with 27% chances of getting the nomination. With Yellen being academic and policy dove, one might think her reappointment would suit pro-growth and low-interest rate economy Trump wishes to have. Nevertheless, her chances are seen diminishing as she is losing to both John Taylor and Federal Reserve Board member Jerome Powell falling into the third place in the ranking of five candidates.

Cohn falling behind

Trump’s chief economic advisor Gary Cohn is also on the list of potential candidates. Cohn is a banking industry veteran with a career at Goldman Sachs and he is well respected by Wall Street.

His chances for getting Federal Reserve chairman nomination are unlikely, because of his crucial role in pursuing Trump’s tax reform agenda in Congress. 

Should Cohn leave from the position of Trump’s chief economic advisor after all the staff that has already been fired in Trump’s team, would Wall Street still believe it?

Trump cheered the fact that the Dow Jones Industrial Average broke all-time high of 23,000 points. Trump likes to be associated with growth and breaking stock market records because it is an easy and fancy publicity for him. With Wall Street losing faith in Trump's team is, in fact, lowering chances of Cohn’s nomination.

Warsh slides  

Kevin Warsh is a former banker and lawyer. His profile and strong republican views once made him a hot candidate, but the age of 47 is seen rather as a disadvantage. 

On the top of it, Warsh is seen as a hardliner pursuing tighter monetary policy and less intervention, policies more of Greenspan rather than Bernanke/Yellen style. 

Jerome Powell leads

Federal Reserve Board member Jerome Powell is running the highest chances of getting the nomination as Fed chairman. 

He is a monetary policy insider that would have represented the continuity at Fed and to his advantage is also his previous position at the US Treasury Department under former President George H.W. Bush.

Dark horse John Taylor

President Trump was impressed after unexpectedly interviewing John Taylor, former US Treasury Department official, and Stanford University academic. His previous experience both academic and professional makes him a dark horse of the race. 

Taylor’s economic ideas are actually deeply incorporated in the economic practice of analyst and economists worldwide. Based on the Unemployment rate and targeted inflation rate is his monetary policy rule examining optimal monetary policy. 

Under Taylor’s leadership, a more rule-based approach would have been chosen by Fed increasing predictivity of its action. On the other hand, Phillips curve is currently being put in doubts as falling unemployment rate is not generating any inflation pressures, challenging the whole concept of Taylor’s monetary rule.  Although Taylor already said that his mathematical monetary concept is rather a guidance than a rule, should the optimal rates be applied based on current macroeconomic conditions, Taylor’s monetary rule says it should be around 3%, not at 1%-1.25% as they are right now.