After weeks of speculation, President Donald Trump is expected to announce his choice for chair of the Federal Reserve Bank on Thursday.
Whomever Trump chooses will have to be confirmed by the Senate in February. The leader will replace current chair Janet Yellen, who will be permitted to finish out 10 years as a Fed governor if she so chooses.
Trump has reportedly settled on former investment banker Jerome Powell. Powell has been a member of the Fed's Board of Governors since 2012 and is widely considered to be in line with the current status quo.
The second-most-likely choice is Stanford economist John Taylor. Though highly respected by the body itself, Taylor has been outspoken in his criticism of the Fed.
As the decision looms closer, Aberdeen Standard Investments chief economist Jeremy Lawson offered insight in a note Tuesday, Oct. 31, regarding the impact both Powell and Taylor might have on the market if either is appointed.
Powell's voting records and public speeches, Lawson wrote, indicate he's someone who is likely to maintain the "broad status quo" at the central bank.
Powell has never voted against any policy during his five years as a Fed governor, affirming the decision to implement quantitative easing in September 2012, raise the Fed funds rate for the first time since the global financial crisis in December 2015 and shrink the Fed's $4.5 trillion balance sheet in September 2017.
He's been an "infrequent speaker," Lawson wrote, "preferring more specialized topics. Powell is an adamant believer in very gradually increasing interest rates and balance sheet reductions, and he's stood behind the move to slowly roll back recession-era regulations on systemically important banks.
"In short," Lawson wrote, "we doubt that a Powell-led Fed would withdraw policy support much faster than the current pace and also think that he would reignite QE should the circumstances require it."
"A Taylor-led Fed has the potential to deviate more from the status quo," Lawson noted. "Taylor's main academic contribution has been to argue for the benefits of setting monetary policy according to transparent 'rules.'"
Many central banks use a variant of the Taylor Rule, named after the Stanford professor. The Taylor Rule holds that policy rates optimally change with a time varying neutral real interest rate, the deviation of unemployment from its natural rate and the deviation of inflation from the central bank's target, according to Lawson.
Ben Bernanke once said Taylor had a "profound" influence on the theory and practice at play in U.S. monetary policy, Lawson wrote. But Taylor has been a public critic of the Fed over several years, saying policy has been too loose since 2003 and quantitative easing was used with too much Fed discretion.
"Taylor's views may not change the short-term trajectory of Fed policy given he has been a supporter of the predictable withdrawal of balance sheet support," Lawson noted. "But in the longer-term, policy could be conducted quite differently, with the Fed more reluctant to cut rates to the lower bound or reignite QE, keener to withdraw policy support once a recovery is underway, as well as less likely to apply judgment to changing circumstances."
Taylor's nomination could result in a "rude shock" for markets, Lawson concluded.
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