Wall Street is buzzing about the possibility of Gary Cohn someday replacing Janet Yellen

Key Points
  • Should President Donald Trump choose to replace Fed Chair Janet Yellen, or if she would leave on her own, Gary Cohn could be the leading replacement, according to speculation on Wall Street.
  • Cohn serves as head of the National Economic Council and is the former COO of Goldman Sachs.
  • Other potential candidates are Kevin Warsh, Thomas Hoenig and John Taylor.
Trump signals open to keeping Yellen at Fed
Trump signals open to keeping Yellen at Fed

Should President Donald Trump choose to replace Fed Chair Janet Yellen when her term expires next year, he could well turn to someone close by to fill the void.

Speculation is building on Wall Street that a likely replacement to run the central bank would be Gary Cohn, director of the National Economic Council and Trump's closest economic advisor. Cohn also is a former chief operating officer of Goldman Sachs.

"The buzz among those who claim Cohn confides in them is that he would like to eventually replace" Yellen, assuming Trump decides to move in a different direction when the chair's term ends in early February, Beacon Policy Advisors said in its daily report for clients Tuesday.

"On paper, Cohn likely meets Trump's expected top two requirements for a Fed chair candidate," the Beacon analysis said, specifically citing Cohn's advocacy for deregulation and his likelihood to keep interest rates low as Trump seeks to implement his pro-growth economic policies.

Trump has had an awkward relationship with Yellen.

During the campaign in 2016, he openly chided the central bank chief, accusing her of keeping interest rates low and using monetary stimulus to prop up the economy under former President Barack Obama.

Gary Cohn
Andrew Harrer | Bloomberg | Getty Images

However, he's been relatively mum about Yellen since taking office in January. He also has emphasized the need for a cheap dollar and low interest rates as the economy seeks escape velocity from an extended period of low growth.

"If Trump wants rates to be as low as possible, (Yellen's) still the best choice," said Greg Valliere, chief global strategist at Horizon Investments and a widely followed expert on the Wall Street-Washington connection. "In my career, I've never seen a president who favored higher interest rates. That's pretty unusual."

Cohn, though, also would be more likely to endorse monetary policy that would fit the Trump agenda.

The downside to Cohn

Multiple sources on Wall Street say Cohn is among the top contenders, along with former Fed Governor Kevin Warsh and FDIC Vice Chair Thomas Hoenig, to replace Yellen.

"He's the leading contender," said Christopher Whalen, an insider in the banking world and currently head of Whalen Global Advisors. "Every Fed chairman in recent memory going back even to (Paul) Volcker went through the White House in one way or the other. ... It would certainly make sense."

A White House spokeswoman said the chatter was "entirely speculation" and called the Beacon report and any others "inaccurate."

On a personal level, Whalen said he favors Warsh for the position but believes Cohn "wouldn't be a bad choice." Whalen thinks Cohn would "have no choice" but to advocate for keeping rates low during what Whalen believes will be an economic slowdown ahead.

There are several issues on the downside for Trump to pick Cohn.

Most notably, the president is relying on Cohn to usher his economic agenda through Congress and help with the implementation, particularly regarding tax reform. If Trump can't get a tax plan passed by next February, that would make it tougher to let go of Cohn.

Moreover, CNBC recently reported that Cohn actually may have pushed Trump to keep Yellen on board. However, it's not clear whether Yellen, 70, even would want to be given another them.

In the case that Yellen would want to leave, Cohn, along with Hoenig, Warsh and Stanford economist John Taylor, "would certainly be on the short list," Valliere said. "Cohn would be an interesting pick, though there would be some concern that he was politicized and the markets could view him with some suspicion that he is too close a political ally with Trump."

Then there's the Goldman connection. Critics have ripped into Trump for perpetuating the "Government Sachs" culture in Washington where so many of the firm's principals have found their way into high levels of government.

"It remains unclear though, especially this many months in advance of Yellen's term ending, as to whether there will be sufficient support for Cohn for this role within the West Wing at that time and whether he could even get confirmed given his lack of conservative credentials and academic background, not to mention his prominent ties to Goldman Sachs," Beacon said in its note.

Watch: Cohn backs splitting lending & investment banks

Cohn backs splitting lending and investment banks
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