Will an ‘easy money guy’ be the next Fed chair?

Federal Reserve Chair Janet Yellen speaks during a press conference after the Federal Open Market Committee meetings in Washington, DC, on September 20, 2017.
Saul Loeb | AFP | Getty Images
Federal Reserve Chair Janet Yellen speaks during a press conference after the Federal Open Market Committee meetings in Washington, DC, on September 20, 2017.

As we head into the fourth quarter of the year, some big decisions are coming up for President Donald Trump and one of them may shake up global markets for years to come.

Trump told reporters last week that he will be announcing who his pick for the next Federal Reserve chair is by the end of October.

Janet Yellen's term expires in February 2018 and it is unclear whether she will be re-appointed given how critical Trump was of her during the campaign trail. It's also unclear whether she would accept a reappointment in the first place, though there are reports that she met with Ivanka Trump for an informal breakfast back in July.

Towards the end of July, Trump told the Wall Street Journal that Yellen is in fact doing a "good job" and may still be in the running to stay on as Fed chair. This hasn't stopped the market from trying to guess who the new head of the world's most influential central bank may be.

So far the top names put forward for the role are ex-Fed member Kevin Warsh (currently polling 47 percent on Predictit.org) and current Fed Governor Jerome Powell (31 percent). Powell is said to be favored by Treasury Secretary Steve Mnuchin.

Senior economic advisor Gary Cohn (11 percent) — who was once the bookmakers' favorite for the role — seems to have lost momentum following comments he made after the Charlottesville riots that indirectly criticized his boss.

A hawkish appointee

The risk however is that Wall Street may not take too kindly to a hawkish appointee.

The current favorite Warsh is renowned for being very critical of current monetary policy and has reportedly criticized the Fed for being a "slave" to the stock market after years of loose policy.

A Powell nomination may be absorbed better by the market as he is towards the dovish end of the spectrum. In comments made towards the end of August, Powell said "it's too soon to make decisions about particular meetings and whether to raise rates but I think … we have the ability to be a bit patient."

With tax reform and expansionary policies on the horizon, a Fed with an aggressive tightening stance could derail fiscal efforts and send the economy back into a downward spiral. This has led some market investors to believe that Trump will opt for a more dovish nominee.

Last week, CEO of Double Line Capital Jeffrey Gundlach added a new name to the roster by saying he thinks the current President of Minneapolis Federal Reserve, Neel Kashkari, may be Trump's number one pick for being "the most easy money guy that's in the Federal Reserve system today." Kashkari recently said that rate hikes may actually be harming the economy — putting him right at the bottom of the dovish spectrum.

While market indicators point to a 70 percent probability of a December rate hike, there is roughly only one hike priced in for 2018 and 2019 respectively — versus the Fed's forecasts which envisages around three hikes for the next calendar year. Is the market planning for an "easy money guy/girl"' after all?