Source: Federal Reserve Board of Atlanta
When appointed as a Fed governor in 2006 Warsh was the youngest ever to take the post. After leaving in 2011, he became outspoken in his criticism of the Fed, particularly with respect to perceived ‘group-think,’ public communication and the influence that financial market movements have upon the setting of monetary policy. Markets tend to not react well to regime shifts and I imagine Warsh’s nomination would be an indication of more hawkish policy intentions than the current approach. Earlier this year he spoke of “liquidity gaps” and not “output gaps” reflecting his concern that policy was too loose. Note Warsh is married to the daughter of one of Trump’s close friends Ronald Lauder.
On one hand the incumbent Yellen could be seen as an ideal choice for President Trump, her dovish tone striking a chord with the President, keeping debt service costs low for a step-up in fiscal spending. However, on the other, throughout the campaign Trump repeatedly criticised her approach. Perhaps the fact she was chosen by former President Obama and the desire to signal a regime shift may indicate she will not be reappointed. Indeed, she hasn’t even said publicly whether she wishes to continue in the role, but if she were nominated we’d expect the initial market reaction to be positive and portfolio performance to benefit accordingly.
Currently Director of the National Economic Council and former President at Goldman Sachs, Cohn was initially touted for the top job, however since his criticism of the President’s response to the Charlottesville riots his chances of being elected have dwindled. We think it is more likely he remains at the White House, tasked with convincing Congress to pass tax reform, however a few weeks ago he was seen as the favourite, so do not be surprised if he is appointed.
Rest of the World
It is not just in the US where key central banking positions are under review.
Governor Kuroda of the Bank of Japan, who has overseen the large scale ‘quantitative and qualitative’ monetary easing, is due to step aside in April 2018. Whilst there is little chance of meeting the 2% inflation target during this term, there are definitely signs that the economy is picking up. An Abe victory in the upcoming general election is seen as likely giving support for a second term for Kuroda and a continuation of the extremely accommodative policy approach. Any shift from the status quo would have a significant impact on financial assets, considering that the Bank of Japan owns approximately 40% of the local bond market and 5% of the equity market.
Finally, in Europe, ECB president Draghi and BoE Governor Carney are both due to end their terms in 2019. This may seem like a while away, but no doubt focus on possible successors and the outlook for policy will heighten in 2018.
The key message is that in conjunction with analysing the macro-economic outlook for indications about the direction of future policy, we will also be keeping a close eye on the shifting composition of personnel at major central banks, and their corresponding stance to supplement our analysis in making asset allocation decisions.