Kevin Warsh is far from a lock to replace Janet Yellen as Fed chair

Key Points
  • Former Fed Governor Kevin Warsh met with President Trump on Thursday.
  • Warsh has always been on the short list to fill the Fed chair position if Trump decides to not re-nominate Janet Yellen, but he's not a lock for the job.
  • If tax reform passes, Gary Cohn could end up a front-runner for the job once again.
Kevin Warsh
Mark Lennihan | AP

President Donald Trump's meeting with former Federal Reserve Governor Kevin Warsh suggests the search for a new Fed chair is entering a new phase with the White House hoping to have a decision by the end of the year.

Warsh has always been and remains on the very short list of potential candidates to take over at the Fed when Janet Yellen's term expires in February. And he has a powerful advocate in his father-in-law, billionaire Ronald Lauder, a long-time friend of Trump's.

A source close to the process confirmed that Warsh met with the president on Thursday and said it was "very positive" and that Warsh presented himself as a Fed reformer. This person said current Fed Governor Jerome Powell is also a serious contender for chairman.

But sources close to the matter have been telling me for months that the 47-year-old Warsh is far from a lock for the job and that Trump has expressed concern that the Stanford University fellow and former investment banker seems too young and inexperienced for the job.

Trump tends to like bankers from central casting. That's why people like former BB&T CEO John Allison tend to make Fed lists though he's seen as a long shot to actually get the nod.

Warsh has other problems beyond his relative youth. He's been critical of some efforts to bring strong new political oversight to the Fed, something sources say Trump is eager to see happen.

"He thinks the Fed operates way too independently and is too much a law unto itself," one close friend of Trump's told me recently of the president's views about the central bank.

Warsh is also viewed as relatively hawkish on monetary policy and has criticized the central bank's easy money policies under Yellen as inflating asset prices. It's not at all clear that Trump, who loves to cheerlead the rising stock market, will want to nominate a hawk who might champion faster rate hikes or a quicker drawdown of the Fed's balance sheet.

It's entirely possible that the very smooth and adroit Warsh could convince Trump in private meetings that he is open to more Fed oversight and has no plans to radically alter the bank's current slow and methodical approach to policy normalization. But Trump's self-professed preference for low interest rates means he will at least give strong consideration to reappointing Yellen, something he's said publicly.

Yellen has met with Trump's daughter and advisor Ivanka and developed a good relationship with Treasury Secretary Steven Mnuchin, who will play a central role in any final decision.

Republicans on Capitol Hill, particularly on the Senate Banking Committee, are almost uniformly opposed to Yellen getting another term. But they probably couldn't stop it if Trump decided to go in that direction.

Failing to nominate Yellen for a second term would break with historic precedent and would lead to heavy criticism of the president from not just economic progressives but women's groups that could portray dumping her as a sexist decision.

Trump's preference for less hawkish monetary policy also means that National Economic Council Director Gary Cohn, who publicly clashed with the president over the Charlottesville demonstration, is very much not out of the running. Cohn fits Trump's idea of a swaggering banker and is viewed as likely to be nearly as dovish as Yellen on rates and the balance sheet.

Cohn's fate for the Fed job rests on the success of the tax reform effort. If he helps shepherd a bill with significant rate cuts to Trump's desk, he could re-emerge as a favorite for the job. Before the Charlottesville mess, the Fed job was basically Cohn's, people close to the matter tell me. That scenario could arise again.

For the moment, Warsh's meeting with the president elevates him to the top of the list for the Fed. But he was really there all along and the race is far from over.