President Donald Trump says he’ll name a successor to head the Federal Reserve in the next few days. While the finalists’ resumes and qualifications are being picked over on Wall Street like pigeons on a loaf of day-old bread, the new head of the Federal Reserve will likely have little impact on your retirement account.
But he or she could hold more sway over whether you’ll be able to buy or refinance a home in the next few years.
“The chairman of the Fed matters to individual investors because the direction of monetary policy matters,” says Victor Li, economics professor at the Villanova School of Business at Villanova University in Pennsylvania. “While stock and asset prices may face headwinds in an environment of rising rates, low inflation and sustained economic growth, proper regulation of financial institutions is the bottom line when it comes to reducing market volatility.”
[Read: How the Fed is Affecting Income Investors.]
Let’s look at the finalists. The top three names on the board are:
Fed Chair Janet Yellen. Yellen’s held the job since 2013 and by most accounts has done a good job. Trump was one of her biggest critics during his presidential campaign as he complained the Fed’s dovish policies were propping up the stock market, but since becoming president he’s softened on her considerably.
“First of all, it’s pretty clear that while he likes the thought process of Yellen more and more, he won’t stick with her,” says Jeff White, financial and investments analyst at FitSmallBusiness.com, based in New York. “Trump has a history of refusing to do anything (President Barack) Obama executed, and he refuses to stick with anyone Obama appointed due to the desires of his core voter base. It’s the one ideology that Trump has held on to throughout the year.
“That gives Yellen an almost zero percent chance of staying in the post,” White says. “Plus, Trump’s insiders all want new blood in the position and are pushing different candidates, none of whom want Yellen to remain in her position.”
Federal Reserve Governor Jerome Powell. Powell is the richest member of the Fed’s board (and Trump likes to surround himself with rich people). He is considered to be a dovish centrist on the Fed’s board, voting only five times in the last four years to raise interest rates and always in line with the rest of the committee. If Trump wants to move away from Yellen but keep the status quo on the Federal Reserve, Powell is the choice.
“Jerome Powell is a safe bet,” says Vivian Yue, associate professor of economics at Emory University in Atlanta. “He has served on the Federal Reserve Board for over five years and has a lot of experience. If he is chosen, the market will be calm given his likely continuation of Yellen’s policy. More importantly, the rolling back of the Fed’s balance sheet is a challenge and Powell is probably a good candidate to be in charge.”
[Read: How to Play Income Investments When Rates are Rising.]
One concern, Li says, is that Powell is an investment banker, not an economist, and could be slow to react to inflationary pressures.
“While investment bankers certainly have knowledge of how real world financial markets operate, they lack the scholarly understanding of the larger picture of how those markets interact with monetary policy and connect Wall Street to the real economy,” Li says. “Additionally, it is unlikely that someone with ties to Wall Street banking would be a staunch advocate of the necessary role the Federal Reserve has in supervising and regulating the banking system.”
Stanford economist John Taylor. This would be an interesting pick. While Yellen and Powell are considered dovish — or favoring accommodative policies to support the market — Taylor is the most hawkish choice. The scholar’s philosophies favor substantially higher interest rates despite the nation’s low inflation. If Taylor is the choice, he will likely face resistance from other Fed members and there could be a lot of negotiating and compromising in board meetings.
“Taylor is most famous in policy circles for arguing that the Fed should hew close to the recommendations of a simple interest rate rule that is named in his honor. The Taylor Rule is currently recommending much higher interest rates,” says Narayana Kocherlakota, professor of economics and former president and CEO of the Federal Reserve Bank of Minneapolis. “I believe that this means that a Taylor-led Fed is likely to foster higher interest rates going forward than a Yellen-led or Powell-led Fed.”
Aaron Jackson, an economics professor at Bentley University, says Taylor may have a hard time, at least at first, bringing the board to consensus, but believes he would adjust to the role.
“I attended a conference recently in which Taylor spoke, and I found him to be a charismatic tactician,” Jackson says. “So if he does become chair, I think he will find a way to bring some on the FOMC and the Federal Reserve staff to appreciate the value of reference (monetary policy) rules, without formally implementing such a framework as has been suggested in recent congressional legislation.”
Regardless of whom Trump picks, the Fed chair will inherit a healthy economy — unemployment and inflation are low, the stock market is still a great place to invest and interest rates are going up in 2018. Even a slightly quicker rate of increase would keep interest rates at close to historical lows.
[See: 10 Long-Term Investment Strategies That Work.]
“This decision is important to the average Joe because this head of [the] Fed will control when and how interest rates are increased,” White says. “This will have a direct impact on the economy, which could impact your assets in a 401(k) account, but it will also impact you as someone looking to buy a house or borrow money for a business.
“Your 401(k) should be balanced enough that you’ll be fine no matter who’s chosen,” White says. “But, then again, everyone thought that before 2008 and some never recovered.”
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Trump’s Decision on the Fed: Why It Matters originally appeared on usnews.com
