White House signals huge shift in race to name next Fed chair

Have we lost one of the “Two Kevins?”

Another twist in the politics-adjacent saga of the next Federal Reserve chair is in the books.

Betting markets went berserk after President Doland Trump signaled that he may keep National Economic Council Director Kevin Hassett, a top contender to be the next Fed chief, in the White House.

Meanwhile, Fed watchers opined that former Fed Governor Kevin Warsh’s candidacy shot through the roof because he was seen as the more independent candidate to replace Jerome Powell in May — which is what investors have maintained is crucial to financial and economic success.

But the president, who has been teasing reports about his eventual nominee for months, has made it clear that he would demand loyalty from whomever he nominated, especially when it comes to slashing interest rates to 1% or lower.

DOJ probe stymied Fed nominee process

Blowback from the Department of Justice’s unprecedented criminal investigation into Powell threw a monkey wrench into Trump’s nomination process over heightened concerns from economic, business and political leaders that the independence of the central bank was at risk.

Two key Republican senators said they would block Trump’s eventual nominee because of the DOJ probe into the $2.5 billion cost of the renovations of the Fed’s headquarters and whether Powell lied to Congress about price.

The president declined to say Jan. 16 what his decision was, adding only that it would be announced in the next few weeks.

The Wall Street Journal reported that Krishna Guha of Evercore ISI said Trump’s Jan. 16 comments were not “a definitive signal.”

 The president…appears to enjoy the drama of this ‘Celebrity Apprentice’ season. But it does look as if [Warsh] is for the first time the clear front-runner,” Guha said.

Warsh has not commented on the process

Warsh serves as the Shepard Family Distinguished Visiting Fellow in Economics at the Hoover Institution and lecturer at the Stanford Graduate School of Business.

He is a partner at Duquesne Family Office and serves on the board of directors of UPS and Coupang, the leading Korean e-commerce company. 

Warsh, an attorney, served as a Fed governor from 2006 to 2011, and was once praised by then-Chair Ben Beranke for his deep ties to Wall Street. 

• But Warsh resigned from the Fed in opposition to Beranke’s bond-buying programs.

• Warsh served as the Federal Reserve's representative to the Group of Twenty (G-20) and as the Board's emissary to the emerging and advanced economies in Asia. 
• In addition, he was Administrative Governor, managing and overseeing the Board's operations, personnel and financial performance.

Related: Jamie Dimon Warns of Global Crisis Over Fed Probe

Since then, the veteran GOP staffer has been a vocal critic of the central bank, calling for a “regime change.”

He’s seen as more hawkish and more independent than Hassett.

Warsh argues that rates can be cut sharply to spur investment and housing affordability. 

• He has said that the Fed’s large balance sheet signals institutional overreach.
• Warsh is a critic of the Fed’s culture, saying it strayed into politically charged areas like climate change that are beyond its mandate.

Hassett is a longtime Trump ally

Hassett has been closely aligned with Trump since serving as head of the White House Council of Economic Advisers during Trump 1.0.

He then went on to serve as an adviser to Jared Kushner’s Affinity Partners.

Trump brought Hassett, a conservative economist, back to lead the National Economic Council early last year.

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Hassett has been bullish on administration policies, arguing there is ample room for more interest-rate cuts due to strong productivity and capital growth.

• He serves as the administration’s de facto economic spokesperson, appearing on television multiple times a week to push the White House agenda du jour.
• He has been a vocal critic of the Fed’s culture, scope and leadership.

Prior to Trump’s comments on Jan. 16, Hassett told Fox Business  that “If I were Fed chair, then I would insist on transparency.” 

Hassett declined to comment if he had spoken to Trump about the Fed chair role.

“If it were to be me, I have said I would take the job, and I would take that job with a commitment to Federal Reserve independence and transparency, and I think that’s something that I think the Fed could have done a lot better in the past,” he told Fox.

Related: Billionaire Michael Bloomberg sends strong message on the economy