(Bloomberg Gadfly) -- President Donald Trump is about to select a new Federal Reserve chair. Whether it's Jerome Powell, Kevin Warsh, or even current head Janet Yellen, the choice will mark a shift in Trump's tenure leading the world’s biggest economy.
That’s because the president, who railed against Yellen during his 2016 campaign, will now be assuming ownership of this credit cycle and however it's dealt with going forward.
If Trump decides to renominate Yellen, he’ll incur the wrath of conservative Congress members who think she’s gone outside her monetary policy mandate. They argue that her approach to regulatory enforcement has been overly expansive and has led to slower growth. But she’s a steady hand at an uncertain time, offering predictability to a market that’s come to expect it.
She will likely err on the side of keeping rates lower, letting the U.S. economy accelerate for a longer period. If Powell is the ultimate choice, he's similar to Yellen in many ways and his selection will imply that Trump endorses the Fed's current path.
Should Trump make a bigger change, say, by nominating Kevin Warsh, a former Fed governor, he’ll be viewed as somewhat responsible should the central bank raise rates too quickly, or make some policy error that craters the U.S. economy. Warsh is known for being critical of recent easy-money policies, arguing against a second round of quantitative easing in 2010. He also said in March 2007 that financial innovation had been an important source of strength. Months later, these innovative products ignited the worst financial crisis since the Great Depression.
Stanford University economist John Taylor is also in the running, as is Trump adviser Gary Cohn. Whoever he picks will have a tough job cut out for them.
The central bank is embarking on a complicated period in its existence, raising short-term interest rates while also unwinding its $4.5 trillion balance sheet. It's doing so amid a relatively tepid economic recovery, without signs of significant inflation and amid lots of questions about the sustainability of growing debt loads, from emerging-markets nations to risky U.S. companies.
So far, the market has been undisturbed by the monetary tightening, a testament to Yellen's ability to telegraph her actions to the market.
Trump has lobbed a lot of rhetorical grenades at officials from President Barack Obama’s tenure. But now he won't be able to dismiss the choices of the Fed as someone else’s mistake. Whatever comes of them will in part be his to own.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.
