Trump considers a major shift at Federal Reserve

Candidates for chair include critics of current policies.

WASHINGTON — President Donald Trump is threatening to upend decades of consistency at the Federal Reserve as he prepares to pick its next leader, narrowing a list of final candidates to include people who could take the powerful central bank in a radically different direction.

Trump is considering two fierce critics of current Fed chair Janet Yellen for the role — Stanford professor John Taylor and former Fed governor and Republican economic official Kevin Warsh — both of whom have spent years attacking the Fed’s approach to keeping interest rates low in hopes of stimulating the economy. If selected, they could move to raise interest rates faster, which could rattle markets.

Some Republican lawmakers, particularly in the House, are quietly lobbying the White House to appoint Taylor, a longtime hero in GOP circles, according to three people familiar with calls and discussions who were not authorized to speak publicly. Vice President Pence also likes Taylor, according to several White House officials not authorized to speak publicly. The Wall Street Journal editorial page, influential among conservatives, endorsed Taylor or Warsh on Friday.

But Trump is also contemplating keeping Yellen, with whom he met this week, as Fed chair. Unemployment has fallen to a 16-year low during her tenure. Top economic adviser Gary Cohn and current Fed governor Jerome Powell, a Republican, are also on the president’s shortlist for the job.

Many on Wall Street argue what’s needed most right now at the Fed is continuity and low rates. Treasury Secretary Steven Mnuchin, a former Goldman Sachs executive, is pushing Powell as the Goldilocks option that would allow Trump to keep the Fed on a steady and familiar course without reappointing Yellen, a Democrat, according to several people close to Mnuchin who spoke on the condition of anonymity because they were not authorized to discuss the internal deliberation.

The White House, which has confirmed the list of five finalists, says Trump aims to announce a nominee before the president leaves for Asia on Nov. 3.

The decision could have wide ramifications for the economy — and politics. Changes in Fed policy can affect economic growth and markets, sometimes in unpredictable ways. The selection of a new Fed chair also comes in the midst of heated debates on Capitol Hill over a massive overhaul of the tax code. Alan Greenspan famously broke with the Fed’s tradition of staying out of politics to endorse George W. Bush’s tax cuts in 2001, lending his imprimatur to the successful effort.

Yellen’s tenure, like that of her predecessor, Ben Bernanke, has been marked by unprecedented efforts to fight unemployment and stimulate economic growth in the aftermath of the 2008-2009 recession. Yellen continued a trend of holding interest rates at historic lows for nearly a decade and even employed never-before-used monetary maneuvers in an effort to accelerate the recovery.

Warsh and Taylor argue that Yellen has gone too far in pushing for economic stimulus, saying she has left the United States vulnerable to the type of out-of-control inflation it faced in the 1970s and early 1980s. If Trump tapped either for the job, the new chair would probably push the Fed to raise interest rates much more quickly to limit the risk of inflation, a move that could startle markets and potentially slow the economy.

Appointing one of them would be a long break with tradition, as sitting Fed chairs have been reappointed by presidents of opposing parties ever since Ronald Reagan did so with Paul Volcker, a Jimmy Carter appointee.

“She’s done a magnificent job,” says Allen Sinai, president of Decision Economics and a longtime adviser to both political parties. “The main problem is she is not a loyal Republican. Janet is a liberal Democrat. She doesn’t hide this.”

Many in the GOP think the Fed is playing too big of a role in the economy, especially after Yellen and Bernanke took the Fed’s assets from $900 billion to $4.5 trillion today.