Fed Hike Aftermath Series: Trump’s Fed chair pick likely to trigger dollar volatility; does it actually matter?

President Trump is soon going to announce his pick for the next Fed Chair as incumbent Janet Yellen’s term is set to expire next year in the month of February. As of now, there are three top contenders for the post; incumbent Janet Yellen, current Fed Governor Jerome Powell, and John Taylor. The pick is likely to add directional volatility to the dollar.

While Janet Yellen and Jerome Powell are very much likely to be bearish for the dollar as selecting them basically signals of a status quo, selecting John Taylor, professor of economics at Stanford University, who introduced Taylor rule is likely to be hawkish for the dollar. Mr. Taylor is widely seen by financial markets as synonymous to hawkish monetary policies. Mr. Taylor has been critical of Fed’s asset purchase programs that have remained a backbone of U.S. as well as global monetary policies since the Great Recession of 2008/09.

But, does it really matter?

To some extent, yes. But just like other governors, Fed Chair casts only one vote for the monetary policies. But even if the appointment of Mr. Taylor helps in making the FOMC board more hawkish, it is unlikely to change its pre-determined path of balance sheet reduction.

Earlier this year, Fed announced its pre-determined path to balance sheet reduction, which has begun this month and should take to 5-7 years to bring the balance sheet to the pre-crisis level. The initial unwinding will begin at $10 billion per month, which will be increased by $10 billion every three months until it reaches the ceiling fixed at $60 billion per month. The new governor is unlikely to change this pre-determined path, which in reality makes the change a little less relevant.

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