According to the Washington Post as of today, of the 689 key positions requiring Senate confirmation, 23 nominees have been announced. Of the 666 remaining, we are particularly interested in two. The Federal Reserve Board of Governors is comprised of seven seats. Two of these seats have been vacant since 2014 when Jeremy Stein and Sarah Bloom Raskin both left. President Obama nominated two governors, but amid the partisan standoff the Senate refused to hold hearings for either one.
Since the election several names have been raised, some of whom have former Fed experience, some from academia and some from private industry. Based on our reading of publicly available information, we think the following names have the greatest likelihood of being nominated.
John Taylor, 70, is a Professor of Economics at Stanford University and has spent several periods in various governmental roles during the Carter, Ford and both Bush administrations. In the world of monetary policy, Taylor is probably best known for a concise formula for monetary policy rule he developed in the early 1990’s that came to be known as the Taylor Rule. An outspoken critic of the policies adopted by the current Fed, Taylor seems eager and willing to be nominated.
In Taylor, the Fed would see an authoritative voice in favor of monetary policy setting that is more rules-based rather than the seat-of-the-pants approach that prevails currently. Taylor also advocates a more limited role for government, a political view at odds with other governors. With an economy that grew at 3.5% in Q316, unemployment at 4.6% and inflation rising towards 2%, he would be a stronger force towards moving rates, and reducing the Federal Reserve balance sheet, back towards more historically normal levels.
Tom Hoenig, 70, is the vice chairman of the Federal Deposit Insurance Corp. From 1991 – 2011, he served as the chief executive of the Tenth District Reserve Bank in Kansas City. In this role, he often dissented in favor of higher rates once he felt the economy was on sounder footing after the 2008 recession. Given his extensive experience in supervising banks, we think Hoenig is a more likely pick to be named the Fed vice chairman for banking supervision, a new post created by Dodd-Frank in 2010, and one of the two seats never filled by the Obama administration.
Upon Hoenig’s confirmation, a related issue will rise to the fore. The duties of the vice chairman for banking supervision are currently managed by another Fed governor, Daniel Turillo, despite his having been neither nominated nor confirmed for the post. It is a fair question whether Turillo, a former law professor, once replaced, will be satisfied returning to a far less impactful role. If he decides to depart, it would allow the new administration to nominate another governor and put an even bigger stamp on the Fed.
With these two individuals bringing their hawkish economic viewpoints and less heavy-handed regulatory approaches to the Fed, expectations of 2-3 rate rises next year will quickly move to 3-4 and change the tone of policy debates for the immediate future.