Powell and Warsh are running neck-and-neck in the betting odds for the next Fed Chair
Spanish risk measures ease as Catalonia seems to step back from the brink
Powell and Warsh are running neck-and-neck in the betting odds for the next Fed Chair — Former Fed Governor Kevin Warsh (35%) and Fed Governor Jerome Powell (32%) are currently running neck-and-neck in the betting odds for the next Fed chair, according to PredictIt.org. Meanwhile, Gary Cohn (17%) and Janet Yellen (13%) and are running neck-and-neck at a distant third and fourth. Two other contenders include Minneapolis Fed President Neel Kashkari (6%) and John Taylor (6%).
Gary Cohn’s betting odds dipped substantially after he criticized Mr. Trump’s Charlottesville comments. In addition, Mr. Cohn has disadvantages of (1) the negative political optics of having Goldman Sachs’ former COO take over control of the Fed, and (2) Mr. Cohn’s lack of academic training or experience in monetary policy.
Choosing Mr. Powell would be President Trump’s safest bet, in our opinion, given that he has 5 years of experience at the Fed and is fully plugged in with the Fed’s current staff and FOMC members. Mr. Warsh, by contrast, would be a largely unknown quantity for the markets since he has periodically criticized the Fed since stepping down as a Fed governor in March 2011.
We believe that Mr. Trump has two main criteria for the new Fed chair: low interest rates and banking deregulation. On interest rates, Mr. Trump has called himself a “low interest rate person.” On deregulation, Mr. Trump has expressed a strong desire to lift banking regulations to try to make loans more available and to stimulate the economy.
Ms. Yellen virtually took herself out of the running for reappointment in August after she gave a strong speech against bank deregulation at the Fed’s Jackson Hole conference. In her speech, Ms. Yellen seemed to be putting Mr. Trump on notice that she would not preside over a tear-down of post-crisis banking regulation.
By contrast, Mr. Powell has shown that he is open to some scaling back some of the post-crisis banking regulations, perhaps qualifying for Mr. Trump’s appointment on this criterion. In addition, Mr. Powell has shown broad support for the Fed’s current monetary policy, which is essentially a cautious, go-slow policy in which interest rate hikes are implemented as slowly as possible.
Meanwhile, Mr. Warsh is a Harvard-trained lawyer and former Morgan Stanley banker who has expressed strong support for banking deregulation and could become Mr. Trump’s pick just for that reason. In addition, Mr. Warsh has a personal Trump connection since Mr. Trump’s good friend, Ronald Lauder, is Mr. Warsh’s father-in-law.
However, Mr. Warsh is thought to be substantially more hawkish than the current Fed. In that regard, Mr. Warsh may be passed over if Mr. Trump puts a high premium on keeping interest rates low to support the stock market and the economy. Mr. Warsh a year ago said that the Fed missed a long window to tighten rates in 2013-15 and that the Fed seems to care too much about the impact of monetary policy on stock and asset prices. When he was a Fed governor, Mr. Warsh opposed QE2. When he stepped down from the Fed in 2011, CNBC commentator Larry Kudlow referred to Mr. Warsh as a “hard money hawk.”
Mr. Trump might prefer Mr. Warsh as an agitator who could shake up the Fed and banking regulation. However, Mr. Trump may not view Mr. Warsh as worth the risk if there is a chance that a Warsh Fed might overdo its rate hikes and cause a recession, which would erode Mr. Trump’s political support and doom his reelection chances.
In short, the safe pick for Mr. Trump would be Mr. Powell, while the agitator pick would be Mr. Warsh. There is also the possibility, however, that Mr. Trump could choose Ms. Yellen or Mr. Cohn or make an out-of-box Fed pick that isn’t high on the market’s radar at present. The markets will know soon enough because Mr. Trump said on Sep 29 that he would make an announcement within 2-3 weeks. This is the second week since Mr. Trump named that timing, suggesting an announcement will be forthcoming either this week or next week, if Mr. Trump sticks to his timing target.
Spanish risk measures ease as Catalonia seems to step back from the brink — Spanish risk measures eased on Monday after indications that Catalonia may not seek to unilaterally declare independence this week after all. The 5-year Spanish credit default swap price on Monday fell by -2.3 bp to 69.2 bp and is down by -5.8 bp from last Wed’s 4-month high of 75.0 bp. The 10-year Spanish government bond yield on Monday fell by -3 bp to 1.67% and is down by -9 bp from last Wed’s 6-3/4 month high of 1.78%. The iShares Spanish ETF on Monday closed up +0.43% at 33.01 and has now recovered by a total of +3.1% from last Wednesday’s 5-1/4 month low of 32.02.
Catalan President Puigdemont today is expected to speak before the Catalan regional parliament. The latest speculation is that he will make some sort of verbal gesture of independence but will not call on the Catalan parliament to officially declare independence from Spain. If the Catalan parliament does declare independence, however, then the Spanish government can be expected to activate a constitutional provision that allows the central government to seize political control of a region and temporarily oust the regional government. Market fears cooled a bit on Monday after large public demonstrations over the weekend against independence, and threats by large companies and banks to leave Catalonia, made clear to the separatists that there are big risks in unilaterally declaring independence.