On 5 October, Randal Quarles was confirmed by the Senate to fill one of the four vacancies on the Federal Reserve Board. Quarles was nominated for the vice chair in charge of financial regulation and is likely to push for more deregulation. To highlight that financial regulation is a focus area for the Administration, the Treasury Department on 6 October issued a 232-page report on recommendations for regulatory reform – that is 223 pages more than the unified framework for tax reform.

 

Chair Yellen echoed the focus on financial regulation in introductory remarks on 4 October, stating that “just last week, the Fed, along with other regulators, took a significant step to reduce the regulatory burden on community banks and other smaller and less complex institutions by proposing to simplify several requirements in the regulatory capital rule.” Yellen is still very committed to the core elements of the Dodd-Frank Act, as laid out in her Jackson Hole speech in August. However, by showing some regulatory flexibility, Yellen remains a contender to her own job as the White House moves forward with the vetting process.

 

Chair decision nearing

The pick for Federal Reserve Chair is supposed to be announced in the coming weeks. On PredictIt.org (a real-money political prediction market by the Victoria University of Wellington), the frontrunners are Kevin Warsh and one of the current Federal Reserve governors, Jerome Powell, both at 35-40% with current Chair Yellen trailing in third.  Interestingly, both Warsh and Powell have law degrees and are not economists.

 

Kevin Warsh was a Federal Reserve board member during the financial crisis and has been auditioning hard over the past couple of month with an article praising the Republican political agenda, but also by attacking the current monetary policy. He thinks Federal Reserve has been more concerned with financial markets than data and he would have favored a start to the monetary-policy normalization in 2012-2014. Hence, Warsh is considered much more hawkish than Yellen – although previous statements don’t always translate into future action.

 

Jerome Powell has been a member of Federal Reserve board since 2012 and is seen as a centrist in both fiscal and monetary-policy matters. He is likely to garner broader support in the Senate than Warsh and is probably a safer pair of hands. But if you want to shake things up – Warsh is your guy. Regardless, with the names under consideration I still expect Federal Reserve’s reaction function to shift in a hawkish direction. That should support the dollar, even as the ECB also begins to move towards normalization.

 

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Federal Reserve vacancies