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Next Fed Chair Will Help Determine Pace Of Interest Rate Hikes

President Trump could ask Janet Yellen to stay on as the Federal Reserve chair, but other names are also circulating.
Pablo Martinez Monsivais
President Trump could ask Janet Yellen to stay on as the Federal Reserve chair, but other names are also circulating.

President Trump says he is very close to making a decision about who will lead the Federal Reserve once Janet Yellen's term expires in February.

The Fed chair is often called the second-most-powerful person in Washington, after the president. By steering interest rate policy, the Fed chair affects economic growth, the pace of job creation and inflation.

The Fed also regulates banks and responds to financial crises — it played a massive role in dealing with the Great Recession by cutting interest rates to record lows and buying trillions of dollars in bonds. So it has a big effect on our economic well-being.

There are still a handful of names floating around. In an interview on Sunday on Fox Business News, Trump mentioned three names: John Taylor, an economist currently at Stanford University's Hoover Institution; Jerome Powell, a current Fed governor; and Yellen, the current Fed chair.

Taylor is probably the easiest candidate to contrast with Yellen. He is the author of something called the Taylor Rule, which is essentially an equation that takes the current growth rate and level of inflation and determines where the Fed should set interest rates. It could put the Fed's decisions on interest rates on autopilot. Some conservatives in Congress have advocated for it.

But critics, including Yellen, say it is not sensitive enough to what is happening in the real world. Taylor has said he would be more flexible than his academic work might suggest. But there's little doubt he would raise interest rates faster than Yellen. Taylor criticized the Fed for holding interest rates too low after the financial crisis, and he continues to believe that.

Powell would probably also be inclined to raise rates faster than Yellen, but not by a lot. He is a former investment banker and served as undersecretary of the Treasury under the first President Bush. Of all the candidates, Powell would probably provide the greatest level of continuity with Yellen's approach.

Trump could decide to keep Yellen at the Fed. Trump was very critical of her during the presidential campaign, but several times since then he has said he thought she has done a good job. And he repeated that during the Sunday interview on Fox Business News.

"I also met with Janet Yellen who I like a lot. I really like her a lot," Trump said.

In some ways that's not surprising. The president is, after all, a former real estate developer. Real estate developers love low interest rates, and low rates have been the hallmark of the Yellen Fed.

So why not stick with Yellen? There are certainly people on Wall Street and in the business community who would be fine with having Yellen reappointed. After all, low rates are good for stocks and many businesses as well.

There have been several other names in the mix including Gary Cohn, who heads Trump's National Economic Council at the White House, and Kevin Warsh, a former Fed governor.

There are multiple reports, quoting unnamed White House sources, that Trump has told aides Cohn is out of the running and that Trump wants Cohn to remain in the White House and work on the tax overhaul.

Warsh was once considered the front-runner. But he, too, has advocated for higher interest rates. In fact, when he was a Fed governor he criticized the Bernanke Fed for holding rates too low during the response to the financial crisis. Warsh warned that the policy would very likely lead to runaway inflation. That didn't happen. In fact, inflation has stayed extremely low. So Warsh called it wrong. Still, he has continued to be an advocate for higher rates, which Trump doesn't favor.

Some analysts are suggesting that Trump could reappoint Yellen and get his low rates, and then appoint Powell as vice chair, since the position is now open. Doing so would give Trump the interest rate policy he wants but also move a conservative and a Republican into the Fed's No. 2 position.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.