Fed: Prospects for the next Chair - Wells Fargo

Analysts from Wells Fargo, consider that the next Federal Reserve Chair will need to find a balanced path that unwinds the balance sheet while keeping the economic expansion going. 

Key Quotes: 

“To reiterate our view, any credible Fed Chair candidate would not meaningfully alter the market outlook or our baseline forecasts for the economy, the path of interest rates or the value of the dollar. That said, the Chair of the Fed can often come to symbolize the institution he or she  represents and in that capacity, command a degree of power and influence over time.”

“Ms. Yellen would signal convention and continuity. Mr. Cohn would be a somewhat unconventional pick inasmuch as he is not a formally trained economist, but then neither was the longest-serving Fed Chair, William M. Martin Jr. Additionally, Mr. Cohn’s extensive experience in finance deflects the criticism of his academic credentials. Mr. Warsh is the most likely of the “longshots” and would also represent a conventional pick with his experience at the White House, at the Fed and more traditional academic credentials.”

“The Fed has lowered its estimates of what it considers the appropriate level for the fed funds rate in the longer-run from 4.25 percent in 2012 to 3.0 percent today. The ultimate terminal fed funds rate will likely be lower when the current cycle comes to an end than it has been in prior economic cycles. With limited scope for the Fed to cut rates when the next recession comes along, whenever that may be, the Fed may have to go back to the well of quantitative easing. This could entail resuming reinvestments or even returning to asset purchases, depending on what economic conditions warrant.”

“Normalization of the Fed’s balance sheet is an important consideration for the next Fed Chair as well. Monetary policymakers will be challenged to find a balanced path that begins the process of unwinding years of unconventional monetary policy while simultaneously keeping the economic expansion chugging along. The various scenarios considered in this report are offered to help decision-makers frame their thinking and make informed decisions as this process unfolds.”