Trump ditches swamp-draining playbook for do-no-harm fed picks

Christopher Condon, Bloomberg News on

Published in Political News

WASHINGTON -- President Donald Trump's claim he's "always been great with jobs" faces a real test as he continues to overhaul the leadership of the Federal Reserve.

But if Jerome Powell, his choice announced Nov. 2 to chair the central bank, is any indication of how he plans to fill other vacancies, the president is likely to play it safe in an attempt to preserve a booming stock market and the third-longest economic expansion in U.S. history.

For Trump, there's too much at stake economically and politically to include the Fed in his "drain the swamp" approach.

"My concern about change at the Federal Reserve has diminished importantly in the last week," said Carl Tannenbaum, chief economist at Northern Trust Corp., who spent four years at the Chicago Fed. "Powell has certainly not been a bomb thrower."

There is, however, plenty more to come. Trump is seeking three new Fed governors, one of whom will also serve as vice chair. The search may swell to four if, as expected, Janet Yellen leaves the Board of Governors when her term as chair expires in February.

Adding to the churn, William Dudley on Monday said he would step down in mid-2018 as president of the New York Fed. That position is the key liaison to Wall Street and typically is the most powerful of the 12 regional Fed chiefs.

The slew of personnel changes poses a set of risks for Trump if things go south on his nominees' watch. Yellen's Fed has arguably laid the groundwork for a quickening economy and stock market rally for which Trump likes to take credit.

The economy grew at an annual pace of 3.1 percent in the second quarter and 3 percent in the third, making for the best six-month performance since 2014. Almost 1.7 million new jobs have been created so far this year, driving unemployment down to 4.1 percent, the lowest level since 2000. On top of that, U.S. stocks have surged to record highs.

"With everything going reasonably well, you may want to make a change, but you don't want to make a significant change," said Drew Matus, chief market strategist at MetLife Investment Management. "If the economy is going fine and you make a change and something goes wrong, then you own it."

Perhaps no surprise, then, that Trump went with Powell, described by many Fed watchers as the best continuity option short of reappointing Yellen, a Democrat. In five-plus years as a Fed governor, the Republican Powell has never dissented from a policy decision taken by the Federal Open Market Committee under Yellen or former Chairman Ben Bernanke.

The Powell pick also follows Trump's selection in July of Randal Quarles, a former Treasury official under George W. Bush, to be the Fed's top official for banking regulation and supervision. Quarles aims to roll back some of the post-crisis banking rules passed under Barack Obama. But neither he nor Powell are seen as wanting to dismantle core reforms.

That pragmatism augers well for those hoping Trump will keep nominating mainstream candidates for the central bank, according to Stephen Stanley, chief economist at Amherst Pierpont Securities.

"They are looking for serious people and they're not necessarily looking for people who will fundamentally shake the foundations of the Fed," he said. "They know the Fed is important to the performance of the economy and they're obviously very focused on that."

It could have been very different. Trump's former chief strategist, Steve Bannon, said in February the new administration took office with the goal of "deconstruction of the administrative state."

Keeping to that script, the president tapped Scott Pruitt, a climate change skeptic, to head the Environmental Protection Agency; Betsy DeVos, known for her advocacy of charter and private schools, to the Department of Education; and Rex Tillerson, an oil executive with no diplomatic experience, as secretary of state.

For the Fed, candidates Trump considered reportedly included John Allison, who has favored dismantling the central bank. If Allison was never a serious candidate, Stanford University economist John Taylor and former Fed Governor Kevin Warsh, were. Both were admired by Republican lawmakers who wanted higher interest rates and less freedom of maneuver for Fed policy makers. Taylor supports formally adopting a mathematical equation to guide interest-rate decisions, while Warsh has agitated against "groupthink" at the Fed.

Trump might yet appoint less orthodox outsiders to some of the remaining openings, but with a moderate in the chair, that may even be a positive development, Matus said.

"In the past you've had Federal Reserve governors who were much more aggressive at dissenting, and to be honest I don't think that was the worst thing," Matus said. "You knew all the views were being considered and evaluated."

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