Ladies and gentlemen, place your bets. U.S. President Donald Trump announced last week he will name the next Federal Reserve chair in the next two or three weeks.
And there are three leading candidates for the job, who we'll detail for you in just a minute...
Since the financial crisis in 2008, the Fed has exercised enormous power over the economy through interest rates and the supply of money available for the economy. Market pundits were left scrambling for legitimacy as ZIRP (zero interest rate policy) and QE (quantitative easing) stomped out the efficacy of traditional forms of investment analysis.
These were programs of low (or even zero percent) interest rates and massive expansion of the Fed's balance sheet as it purchased Treasury securities directly from the Treasury itself. Later, it bought them from the secondary market along with mortgage-backed securities. Its counterpart in Europe - the European Central Bank - also bought corporate bonds.
And there's no denying the controversy the next Fed chair is going to inherit...
All of these moves were supposed to flood the economy with liquidity and grease the wheels of expansion.
However, some view them as controversial because the moves seemed to only benefit upper-income earners and banks. These were the institutions that were not only bailed out during the financial crisis but were able to borrow money from the government at near-zero rates and buy risk-free Treasury securities for a risk-free profit. Plus, lending did not pick up appreciably.
Money flowed into the stock market and bank coffers while the economy bumped along the bottom with anemic growth. Annual U.S. GDP growth has hovered between 1.6% and 2.6% since 2010. In the same time, the Dow has climbed 120%.
Urgent: Feds use obscure loophole to threaten retirees. If you have a 401(k), IRA, or any type of retirement account, this could cause you to miss out on $68,870 or more. Learn more...
Fed policy is concentrated in the hands of a small group of unelected officials. The biggest job the next Fed chair will have will be unwinding the asset purchases and normalizing interest rates without causing major problems for the economy and the recovery itself.
Right now, there are three front-runners for the post of Fed chair: former Fed Governor Kevin Warsh, current Governor Jerome "Jay" Powell, and current Chair Janet Yellen. Clearly, all are intimately familiar with the FOMC.
Trump's top economic adviser, Gary Cohn, is an unlikely candidate due to a public clash over the president's response to the white-supremacist riot in Charlottesville, Va.
Here's a closer look at each of these three candidates...
Because of Warsh's more hawkish views, the market could move the most if he is selected. He has been subtly critical of the Fed in recent years.
He is more inclined to continue raising short-term interest rates. He also favors looser regulation in the banking industry. Since the reduction of regulations of all kinds is part of the Trump agenda, this could make him the front-runner.
Some also say he will throw out the Fed's current playbook and significantly change things up. Indeed, Warsh resigned from his Fed post in 2011 because of his opposition to the bond-buying program. He has called for a revamp of how the Fed makes policy.
He was also a member of President Trump's now disbanded Strategic and Policy Forum, a group of business executives that advised on economic and policy issues.
But he's not the only person to keep an eye on...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
It seems that Powell just represents continuity in an ever-changing Fed lineup. In this context, continuity is almost a continuation of existing policy. However, that is not what the president is looking for in a candidate.
Powell is the remaining Republican-appointee in the Fed, which may make him the alternate play should Janet Yellen suddenly declare she will not continue on past the end of her current term.
He does favor some reduced regulation and gave a speech this week on reducing the burden of the "Volker Rule," banning banks from speculating with their own money.
He also echoed Trump's view that getting to a faster growth rate is critically important.
Yellen became Fed chair in February 2013, after serving as vice chair starting in October 2010.
She is considered by many to be a "dove" (more concerned with unemployment than with inflation) and less likely to push for interest rate hikes. However, in a recent speech, she indicated she does want to keep the pace of rate hikes moving despite the "mysterious" weakness of inflation.
The possibility of Yellen returning as Fed chair seems to have weakened though, due to her resistance to change with regulatory issues. She made it clear her position was quite different than President Trump's. Clearly, the president will want someone who is going to embrace his deregulatory path.
Yellen and Trump may have too many differences, in that they appear to be far apart on the topic of banking deregulation.
The PredictIt marketplace, a real-money betting site that allows speculators to bet on the outcome of political contests, now shows Warsh with a substantial lead over second place Powell at $0.49 versus $0.35. A price of one dollar suggests a certainty that the candidate will be chosen.
This is a big change from a few weeks ago, when Warsh and Yellen, now at just $0.17, were neck and neck. Clearly, the betting public believes Warsh will win thanks to his very different views than current Fed policy. Yellen's beliefs do not mesh with the president's. And Powell, as a current Fed insider, is likely tainted in Trump's eyes under Yellen's watch.
An $80 Billion Cover-Up? Under the watchful eye of Congress, the government will soon be implementing a controversial plan that threatens the retirement of millions of Americans. And they're using an obscure loophole buried in Title 29 of the U.S. Labor Code to do it. If you have a 401(k), IRA, or any type of retirement account, this could cause you to miss out on $68,870 or more. Learn more...
Follow Money Morning on Twitter @moneymorning, Facebook, and LinkedIn.
