The next Fed Chair and the USD


News reports have been swirling regarding the next Chair of the Federal Reserve. Last week, the Wall Street Journal suggested that Trump had interviewed Kevin Warsh and Jerome Powell regarding the role. Trump recently stated that he intends to select a Fed Chair within the next three weeks. As more time goes by, we expect more candidates to be announced.


A hawk and a dove face off

As news reports were leaked last week claiming that Trump had met Kevin Warsh, markets initially responded by bidding up the dollar. Warsh is well-known for turning against Bernanke after initially voting for QE 2. Throughout the financial crisis and in its aftermath, Warsh was convinced that the US was risking its reputation through excessive quantitative easing, despite high unemployment at the time. Despite Warsh’s warnings, an uncontrollable rise in US inflation never occurred. Instead, the world has been fighting the problem of inflation that has been too low since 2013. Given Warsh’s hawkish outlook, if he was selected as Fed Chair, it will probably be a positive event for the dollar.

Later this week, Powell entered the running, with major news agencies reporting that he was also being considered for the top job. As per our US dollar daily update this morning, the betting odds for Powell’s selection are currently around the same area as those for Warsh. Unlike Warsh, Powell has supported many of Yellen’s current policies including a gradual increase of future interest rates and beginning the process of winding down the balance sheet. Unlike Yellen, his view is that the Fed has too much influence over banks today, and is in favor of lightening rules such as the current restrictions on proprietary trading. If he was selected as Fed Chair, it would be a negative event for USD.


Impact on the dollar

Despite the market’s current focus on the next Fed Chair, the impact on the dollar is likely to be limited. Given the current mechanism that governs how the Fed makes its decisions, the Fed Chair does not have much influence. While the dollar may initially strengthen or sell off depending on who is chosen, the impact is likely to be short term at best.

Instead, the dollar is likely to be far more sensitive to changing inflation expectations if Trump makes progress with tax reform or if the euro comes under renewed pressure from falling expectations relating to tapering. 

Topics: US dollar