Kevin Warsh Fed Chair Odds Soar After WSJ Report Of Trump Meeting

Kevin Warsh's PredictIt odds to be the next Fed chair soared moments ago after the WSJ reported that President Trump and Treasury Secretary Steven Mnuchin met with the former Fed governor on Thursday to discuss his potential nomination as the next Federal Reserve chairman, "a White House official said, signaling that the West Wing is moving ahead with a process that the president has said he would like to have completed by the end of the year."

Warsh, a long-running contender to replace Yellen in February, has traditionally been seen as leaning hawkish, writing last summer that "the conduct of monetary policy in recent years has been deeply flawed". He has been a skeptic of the Fed’s efforts to boost the economy through QE and has advocated raising interest rates more quickly.

In immediate reaction, Warsh's odds jumped by 10% to 45% while Janet Yellen's tumbled by 8 to 24%.

That said, "Chairman Warsh" is not assured just yet, and as the WSJ adds, other names in contention include current Fed Chairwoman Janet Yellen, Stanford University economist John Taylor and John Allison, the former BB&T Bank chief executive, according to people familiar with the process. Mr. Allison was offered a position on the central bank’s board of governors earlier in Mr. Trump’s tenure, but turned it down, said people familiar with the offer.

Mr. Warsh is a former Fed governor and was a member of the president’s Strategic and Policy Forum, a group of business leaders that disbanded in August in protest over what they said was Mr. Trump’s failure to sufficiently condemn racism. He was also an economic adviser to 2016 Republican presidential candidate Jeb Bush, who was considered the front-runner for the nomination before Mr. Trump’s political rise surprised the political establishment.

 

Mr. Warsh, a veteran Republican economic policy maker, is married to Jane Lauder, granddaughter of cosmetic icon Estée Lauder . His father-in-law, businessman Ron Lauder, has been lobbying the White House to have the president name his son-in-law to the central bank’s highest post, said people familiar with those conversations.

Most notably, and as noted above, Warsh has historically been one of the most prominent inflation hawks and outspoken critics of existing Fed policies, which explains the sharp move higher in the dollar and the corresponding slide in TSY prices. However, as some desks warn, the reaction may be "extreme" as the WSJ merely reports that they are 'talking.'

As Politico wrote recently, Warsh may be a shoo-in due to his family ties to Trump:

With Gary Cohn’s chances of becoming chairman of the Federal Reserve diminished, another former banker is waiting in the wings for the coveted post: Kevin Warsh.

A veteran of both the central bank and Wall Street, Warsh is already high on the White House’s list of possible successors to Fed Chair Janet Yellen. But he has an enviable reference: his billionaire father-in-law, who met Donald Trump in college and is a confidant to this day.

 

arsh is married to the granddaughter of cosmetics magnate Estée Lauder, putting businessman Ronald Lauder in his corner. Though the president has provided few clear signals on whom he will pick for the world’s most important economic job, that family tie is a durable association with Trump that no other contender can claim.

 

“Anytime someone has a connection to someone who’s powerful or famous, it matters immensely to Donald Trump,” Trump biographer Tim O’Brien said.

 

If Warsh is nominated, “I can’t imagine that would come to pass without Trump having some sort of a conversation with Lauder,” O'Brien said.

Below we post an overnight from Paul Brodsky laying out why, in his opinion, Kevin Warsh will be the next chair:

Warsh

In almost five months, on February 4, the Senate is scheduled to confirm a new Fed Chair. For investors, identifying who will take the role can be more than a parlor game. It is no longer about who’s hawkish or dovish, and the job is no longer about when the Fed will hike rates and reduce the Fed’s balance sheet. In a global economy increasingly fraught with slowing real output growth, highly leveraged balance sheets, political inefficacy, geopolitical disunity, and legitimate threats from non-sovereign fiat currencies, the next Fed Chair could very well have a large role in helping to shepherd global wealth, power...and peace.

We think the next Fed Chair will be Kevin Warsh.

The Job

Any objective observer would conclude that, once chosen by the president, the office of Fed Chair must take primary counsel from its managing partners – primary bank dealers – and then secondarily consider the concerns of, in order of influence: the Treasury Department, a few key congressman, regional and community banks, and finally the Fed’s Board of Governors and regional Fed Presidents.

This reflects: 1) the Fed’s primary objective of doing no harm to the global monetary system, which is managed and supported operationally by the US banking system as it produces the world’s hegemonic reserve currency and credit through its lending process; 2) the need to help fund the US government, and; 3) the need to perpetuate the public reputation of the Fed as an apolitical government agency mandated to support full employment and stable prices (and implicitly, consistent US output growth).

The critical skill set the role of Fed Chairman has traditionally demanded included the ability to engender confidence among public asset markets through a mix of economics-speak and personal gravitas, as well as the ability to comply with the hierarchical requirements outlined above while downplaying (or not acknowledging) the broader administrative power the seat can wield. As a result, the public misperception is that the Fed is an economic body, not a financial one. This serves well most interested parties.

Depending on prevailing financial and economic conditions, the Fed Chairman can be either a bureaucratic administrator or a powerful unitary policy setter. Paul Volcker was appointed Fed Chairman in 1979 and single-handedly took the global monetary order and economy by the throat. He answered to no one, as he re-established the US dollar as the hegemonic currency by raising overnight rates above 20 percent.

Alan Greenspan began his nineteen year Fed Chairmanship in 1987. Despite his prior history endorsing hard-money libertarianism, Greenspan consistently incentivized the banking system and shadow banking system to expand credit without limit. To stimulate the US economy after a brief recession in 1991 followed by a few years of economic malaise, the Greenspan Fed encouraged extraordinary system-wide bank balance sheet expansion. From 1995 to 2005, M3, the only monetary aggregate that included repurchase agreements, grew 12% on average. (The Fed discontinued publishing M3 in February 2006.) To be sure, the leveraging of US balance sheets had its benefits, but it would also create asset bubbles in corporate equity and real estate. (We have also argued that the secular build-up of dollar denominated credit and inextinguishable debt continues to inflate an untenable balance sheet bubble.)

Ben Bernanke replaced Alan Greenspan in early 2006, quite fortuitously it seems. As a leading academic economist, Bernanke had theorized how to navigate economic disequilibria and monetary stress stemming from the bursting of asset bubbles. (Serendipity!) Soon after the GFC struck in 2008, the Fed dropped overnight bank lending rates to zero and embarked on QE, which deleveraged bank balance sheets by creating reserves for them. Bernanke’s Fed made sure to first introduce a scheme called Interest on Excess Reserves (IOER), which incentivized banks not to lend the new base money they received. The Bernanke Fed’s introduction of lending temperance through accounting changes kept (and continues to keep) goods and service inflation low; however it also allowed credit-driven asset inflation to continue and accelerate, which, again, we believe is creating a far larger balance sheet bubble.

Janet Yellen succeeded Bernanke in early 2014, and from very early on her Fed has worked to “normalize” monetary policy, which includes raising overnight bank lending rates to more traditional levels and eliminating the Fed’s debt assets from its balance sheet. After a few fits and starts, and despite low published goods and service inflation and noticeably lethargic output growth, the Yellen Fed has been able to rationalize an ongoing rate hike regime and, just this month, lay out a plan to begin unwinding its balance sheet beginning in October. Ms. Yellen’s role as the Fed’s “normalizer” is complete.

Kevin Warsh

The prospects for Kevin Warsh to replace Janet Yellen as Fed Chair this February seem to have risen. PredictIt, an online political and economic betting site, had Warsh as the leading candidate this morning. (His level was as low as 5 cents two months ago.) We agree with the current wagering consensus.

We think the main job of the next Fed Chair will be to bridge the past and the future. We expect major current trends to continue and accelerate, notably declining global output growth and goods and service inflation, as well as rising aggregate fiat debt levels and global interest in non-fiat stores of value. The next Fed Chair will have to help coordinate the necessary transformation to a global monetary order that accommodates innovation and, quite possibly, broad debt re-characterization.

Kevin Warsh is an experienced investment and central banker who has managed to ascend to the favorite position in the Fed Chair sweepstakes without being a PhD economist or franchise financier. His abundant implied political skill and lack of branding, along with his relative youth (47), make him the likely choice.

Warsh is already vetted and positioned to pass the political appointment process and then work with US and global banks and monetary authorities to help advocate for established protocols that serve them. As we implied above, the winning candidate requires acceptance from primary dealers first, then the White House and Congress. Acceptance from Wall Street requires the willingness to advance the interests of asset markets (to sustain economic liquidity) while also advancing a public narrative that maintains the general appearance of economic soundness. Warsh seems to present no problems in this regard.

We would not expect the White House to have a problem appointing Warsh either. President Trump’s experience suggests he would be satisfied with: 1) the assurance that the Fed would not execute restrictive credit policies during his term (usually a taboo topic not mentioned in an interview for the position), and 2) the ability to follow through on a campaign threat to remove Janet Yellen (and perhaps find joy and political gain in doing so unceremoniously). We suspect the key to getting the post would be indicating to Mr. Trump that restrictive policies may not be in the economy’s best interest. Once confirmed by the Senate, the Chair’s unitary powers may take precedence. We suspect Ms. Yellen already sees the end of her term coming, judging by her priority to set a schedule for QT to begin in October.

Warsh is intelligent, ambitious, flexible, articulate, diplomatic, and very aware of the economic implications of technological innovation, the limitations of old ways in dealing with it, and the inevitability of change. We know he reads – and considers – a broad range of views. We believe that, if/when circumstances warranted, he would be able to address the inevitable balance sheet recession and contribute to innovative solutions that position the next monetary order to satisfy a broader range of constituents, including those interested in production-based economics and wealth.