Taylor for Deputy Fed Chair Could be Next Spur for the Dollar

federal reserve exchange rates

Economist Taylor may yet be appointed to the Federal Reserve in an overture to Republican lawmakers by President Trump, and this would be a bullish move for the Dollar.

Although Jerome Powell has taken the top spot at the Federal Reserve, the selection of officials to fill the other three vacancies - most notably that of vice-chairperson - could have a significant impact on the US Dollar argues Commerzbank analyst Thu Lan Nguyen.

The new chairman of the Federal Reserve is Jerome Powell, a career central banker who used to work in regulation and is widely expected to follow in the footsteps on the previous Fed chair Janet Yellen, by following gradualist approach to normalizing monetary policy.

The Dollar had rallied in anticipation of uber-hawk John Taylor being cited as a favourite for the rolel; when his appointment didn't transpire the Dollar pared gains as Powell represents an extension of the status quo.

Yet there is still considerable speculation as to who might fill the other important vacancy at the Fed - that of the vice-chair, previously occupied by Stanley Fisher.

The possibility that President Trump, who is in charge of the final selection, might choose the other main contender for the chair, Stanford Professor John Taylor, to be vice-chair instead, now seems increasingly likely, according to Thu Lan Nguyen.

"As Powell does not seem to have a strong view on monetary policy, the position of the vice chair, in particular, could turn out to be an important one," said Nguyen.

"It is possible that the US economist John Taylor, who had been one of Trump’s top candidates for the position of chair, might once again be amongst the top contenders," he continues.

If Trump chose Taylor the Dollar would rise because Taylor is almost certainly in favour of raising interest rates substantially since the rule he invented indicates they should be a lot higher than they actually are.

Nguyen notes that Trump's "economic advisor Gary Cohn seemed confident recently that Trump would nominate a candidate for the post before the end of the year."

Yet he sees further reasons to expect Trump to name Taylor apart from personal preference, the choice of Taylor would win Trump favour amongst Republicans in Congress, many of whom like Taylor's rules-based approach to monetary policy.

"By selecting him Trump would offer a compromise to the Republican Congress members in particular who consider Taylor to be a dream candidate as he prefers a rule-based monetary policy as do many of them," says the Commerzbank analyst.

Trump needs all the support he can get as he sets about trying to get at least one of his policies approved by Congress - in this case, tax reform.

"In view of the fact that Trump will probably require every single vote of his party members in the US Senate to be able to pass his tax reform bill this may be seen as good timing for a “present” of this nature," said Nguyen.

The selection of Taylor for the number two spot is, therefore, a bullish background factor to consider in relation to Dollar pairs.

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