Should President Donald Trump choose Kevin Warsh to run the Federal Reserve, he'll be getting someone who doesn't exactly fit the mold for the position and could bring significant changes to the way the central bank operates.
In fact, Warsh might be just different enough from current Chair Janet Yellen to please Trump while still maintaining loose enough policy not to tank the economy.
"He has the conservative credentials," said Christopher Whalen, head of Whalen Global Advisors and a respected voice in the world of finance and central banking. "He's a very good choice because he's not an economist. He has the conservative and intellectual credentials to carry it off. ... He would be a relatively noncontroversial pick."
Warsh vaulted to the front of the pack Friday when reports emerged that he has met with Trump and Treasury Secretary Steven Mnuchin, apparently to talk about taking over as Fed chair after Yellen's term expires in February.
In addition to his conservative and intellectual credentials, he also has a vital personal connection — his wife is Jane Lauder, daughter of Ronald Lauder, a longtime Trump pal and heir to the Estee Lauder cosmetics giant.
While the family incentive may have given Trump some impetus, Wall Street will focus more on what Warsh brings to the table policy-wise. Bond yields already moved higher Friday after news reports of the meeting, an indication that the fixed income market sees a more hawkish Fed emerging.
"Kevin Warsh frankly in intellectual sense is going to be willing to break with the old playbook," Whalen said. "He would be very balanced and the Street would have no problem with Warsh. The problem with Yellen is she has done too much with no effect."
The Yellen Fed continued for a time the practices under previous Chairman Ben Bernanke — accommodative policy that included low interest rates and an aggressive bond-buying scheme known as quantitative easing that helped keep banks liquid and the stock market humming.
Warsh would be charged with piloting policy forward, a task that he would be prepared for as a former Fed official acquainted with the nuances and granularity of central bank activity.
"Kevin Warsh is an experienced investment and central banker who has managed to ascend to the favorite position in the Fed Chair sweepstakes without being a PhD economist or franchise financier," Paul Brodsky, at Macro Allocation, said in a note. "His abundant implied political skill and lack of branding, along with his relative youth (47), make him the likely choice."
Warsh is currently a distinguished visiting fellow at Stanford University's Hoover Institution. He could not be reached for comment.
He has emerged from a crowded field of contenders that also includes Stanford economist John Taylor, current Fed Governor Jerome "Jay" Powell and, perhaps, still chief White House economic advisor Gary Cohn, whose near-lock on the position evaporated after he publicly criticized Trump's reaction to the August racial violence in Charlottesville, Virginia. (Some think Cohn could ascend back up the ladder should tax reform pass.)
Brodsky sees Warsh as the type who can take the Fed from its current focus on interest rates, balance sheet reduction and bank regulation to a broader role as an agent for global growth.
"We think the main job of the next Fed Chair will be to bridge the past and the future," said Brodsky, who added that Warsh probably would have to assure Trump that, despite expectations that he might be perceived as pushing for more aggressive policy, he in fact would be mindful of promoting growth.
"We suspect the key to getting the post would be indicating to Mr. Trump that restrictive policies may not be in the economy's best interest," he said. "Warsh is intelligent, ambitious, flexible, articulate, diplomatic, and very aware of the economic implications of technological innovation, the limitations of old ways in dealing with it, and the inevitability of change."
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