Now with no clear winner in sight, markets see a tight horse race shaping up for the Fed chairmanship in a shifting field.
A report that President Donald Trump was impressed by Stanford University economist John Taylor drove Treasury yields slightly higher Monday afternoon. Around the same time, another article said the the much more dovish Fed Chair Janet Yellen for another term, helping to push yields lower.
Last week, markets saw two different candidates as the leading contenders — Fed Gov. Jerome Powell and former Fed Gov. Kevin Warsh. Powell took the lead after a report that he was the choice being pushed by Treasury Secretary Steven Mnuchin. The week before, the more hawkish Warsh was seen as being the top choice following reports he could have a lock on the job because of his Wall Street background and family ties to Trump.
"I actually think that today's [bond] market movements kind of suggest the market doesn't have a firm idea," said Tom Simons, Jefferies money market economist. "It's kind of bouncing around on rumors and headlines. I think it's because it's hard to know what the decision criteria is. Where do these guys fall on the strata? You're going to know when you know."
Both Warsh and Taylor are viewed as more hawkish than Yellen and even Powell. Yields have moved higher when reports favored either of them.
"Taylor and Warsh are more cut out of the same fabric. Taylor is the economist version of Warsh, and Taylor is Warsh's mentor," said Diane Swonk, CEO of DS Economics. The two work together at Stanford's Hoover Institution. "Warsh is the markets guy, and Taylor is the actual economist."
Swonk said Taylor, who believes the Fed should follow strict rules on full employment and inflation when raising rates, would quickly work to make the Fed more rules-based and could drive interest rates higher. If Taylor looks to be in the lead, interest rates will rise.
"It suggests the fed funds rate is way too low right now," said Swonk. She said it's not out of the question that Trump could take Warsh and Taylor, with Taylor as Fed chair. The two together could make an interesting transition at the Fed, and they could act more quickly to deregulate financial institutions, a goal of the Trump administration.
The PredictIt probability market moved dramatically after the Bloomberg report about Taylor, whose "Taylor rule" on interest rates is widely discussed in markets. Taylor suddenly jumped above Warsh for second place with 25 percent odds to Warsh's 23 percent. That was still below Powell, who was in the lead with 29 percent.
Yellen was a not-so-distant fourth with 20 percent odds, followed by White House economic advisor Gary Cohn, with just 7 percent. Politico reported that Trump will interview Yellen this week.