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Are the Hawks Circling Around the Fed Chair?

Speculation over who President Donald Trump will appoint to chair the US central bank is mounting.

Image via Tim Evanson/Flickr CC

With current Federal Reserve Chair, Janet Yellen’s three-year term coming to an end in February, speculation over who President Donald Trump will appoint to chair the US central bank is mounting, writes FXTM Analyst, Lukman Otunuga.

True to form, Donald Trump has kept commentators on their toes this week, promising to announce his choice for one of the most powerful economic jobs on the planet “very soon.” While his team did their best to manage expectations, stating that an announcement was more likely in early November, Trump used Tuesday’s Republican lunch to heighten speculation, canvassing Senators for their opinion on the appointment with an impromptu show of hands.

The Republican motive behind the Fed Board Chair appointment is obvious, Trump needs someone who will support his reforms. Current incumbent Janet Yellen has been circumspect about disrupting the markets, and is seen as resistant to White House deregulation of the financial sector. While previous Presidents have traditionally refrained from major changes to central bank leadership in the early days of their Presidency, few expect Trump to follow suit and leave Yellen in place. Even without her perceived resistance to his planned overhauls, the 45th President has made a habit of jettisoning Obama-era legacies.

So, it was little surprise then that Tuesday’s unscripted straw poll saw dovish Yellen toppled from her perch. Given the choice, it would appear GOP senators favour hawkish John Taylor, a Stanford University professor with a history of advising Republican leaders. Although Yellen and Jerome Powell were, apparently, well represented in the vote.

Should Taylor get the nomination, we would likely see a very different Federal Reserve to the one of the past seven years. A Fed under Taylor would be a stark contrast to Yellen, and would likely lead to rising interest rates. While a rate hike would strengthen the dollar, it may also dampen consumer spending; both outcomes that are unlikely to sit well with a President known to favour a low dollar.

The apparent alternative, Jerome Powell, is another staunch republican and, until Tuesday, the obvious forerunner. There are marked similarities between him and Yellen, and a Federal Reserve under Powell would likely hold firm to a more gradual increase in interest rates. The key difference between Powell and the current Fed Chair is that he is reportedly receptive to plans to deregulate the financial sector. There is also speculation that he may be open to repealing or revising the Dodd-Frank Act, a financial reform of the Obama Administration that Yellen has championed at length.

With headlines focused on the apparently imminent announcement of a new Fed chair, the latest hurdle to Trump’s tax reforms flew under the radar. The full bill is reportedly set to be released Wednesday 1 November, but rumours are rife that it lacks support from key GOP players, most notably John McCain and Bob Corker.

The markets initially took heed of this latest twist in the tax reform saga, with USDJPY losing 30 pips on Tuesday. However, the impromptu lunch poll saw it quickly recover as news of Taylor’s apparent win hit the headlines .The support continued into Wednesday, with the Dollar Index at a 13-session high, buoyed by mounting speculation that a hawk could soon take the helm at the Fed.

For the moment, the markets are waiting with baited breath to see whether the announcement of the new Federal Reserve Chair will be this week’s big surprise, or next week’s. With Trump’s Asian tour scheduled to kick off on November 5, surely he can’t leave us in suspense too much longer?

For regular market updates and commentary, follow Lukman on Twitter @Lukman_FXTM.