World' s Central Bankers,  Finance Officials Keep Close Eye on Selection of Next Fed Chief; President Trump's decision could have significant impact on emerging markets

By Josh Zumbrun 
15 October 2017

As central bankers and finance ministers from around the world gathered in Washington last week, the discussion returned many times to the fate of one person in particular: Federal Reserve Chairwoman Janet Yellen.

President Donald Trump will soon make one of the most consequential appointments of his administration when he nominates the next Fed leader. Because the U.S. central bank sets monetary policy for the world's largest economy, the decision was of urgent interest to the foreign officials who were in Washington for the annual meetings of the International Monetary Fund and World Bank.

Ms. Yellen's term expires in February. Mr. Trump is considering asking her to stay on but has also interviewed three candidates to succeed her: current Fed governor Jerome Powell, former Fed governor Kevin Warsh and Stanford University economist John Taylor.

Mr. Powell is a Yellen ally on interest-rate policy, while Messrs. Warsh and Taylor are vocal Fed critics.

The level of uncertainty is "wider than previous transitions because the range of candidates is probably broader," said Vincent Reinhart, chief economist of Standish Mellon and former director of the Fed's monetary policy division. "If you have a new chair who feels differently about the science of monetary policy, it could be a difficult transition."

The world's finance ministers and central bankers have no say in the selection, yet it is of crucial importance for their economies. Fed policies influence global economic growth, stock prices, bond yields and exchange rates, including the value of the U.S. dollar, the world's largest reserve currency.

A new Fed chair might change the course of U.S. interest rates, forcing budgets and monetary policies around the world to adjust. If the new Fed chairman favored higher interest rates, it could strengthen the dollar, sparking capital to rush out of emerging markets.

"We borrow in U.S. dollars, so if the Fed decides to increase the interest rate that means additional costs on our borrowing going forward," said Saudi Arabia's Minister of Finance Mohammed al-Jadaan. He said he isn't worried about the transition based on the record of recent Fed leaders.

"I think the U.S. has proven to be more than capable of putting significant brain cells in that position," he said. "The people have been really, really incredible, so I'm not at all worried."

In interviews with central bankers and finance ministers from Poland to Paraguay, many acknowledged they are watching the decision closely but expressed hope that the Fed would remain a source of stability.

Behind the scenes many are quite worried, Mr. Reinhart said. But it is "unwise to say publicly 'I'm really worried about the next Fed chair,'" he said.

The candidates under consideration could have quite different implications for global policy makers. Mr. Taylor has proposed using a mathematical rule to set Fed interest-rate policy. His "Taylor rule" prescribes a significantly higher benchmark interest rate than the Fed's current setting.

Mr. Warsh has been a sharp critic of the Fed's easy-money policies in recent years and indicated he would pursue a different approach.

One source of comfort for many world leaders is that U.S. interest-rate policies are set by the Federal Open Market Committee, consisting of all the Fed's governors, the president of the New York Fed, and a rotating group of four other regional Fed bank presidents. A new chairman would have to build a consensus around his policies among many of the same people who have endorsed Ms. Yellen's strategy of raising rates gradually.

"I know there is a very good team of FOMC people, and whatever happens I'm not afraid of the future of American monetary policy," said Mateusz Morawiecki, Poland's deputy prime minister who is also the minister of economic development and finance, in an interview with The Wall Street Journal.

For much of the world, the Fed's committee-driven process is a source of both stability and admiration.

"This is something we usually admire in the U.S. and that we lack in Latin America, which is the stability of the institution," Carlos Fernández Valdovinos, the governor of the Central Bank of Paraguay, told The Wall Street Journal.

For emerging markets like Paraguay, an abrupt increase in U.S. interest rates can cause investors to pull money from their countries and force their governments to raise rates to prevent capital flowing out, even if it isn't otherwise helpful for their economies. Mr. Fernández Valdovinos said smooth public communication from Ms. Yellen has allowed the Fed to raise rates without harming emerging markets.

"As long as the Fed communicates and does movements slowly, I don't see a problem with the emerging markets" going forward, he said. "We've had time to prepare for an increase in interest rates."

Fed Vice Chairman Stanley Fischer—whose last day in his job is Monday—said Friday that Mr. Trump should nominate Ms. Yellen for a second four-year term.

"Janet is a safe pair of hands and very good at explaining what she is doing and persuading people of what she's doing," Mr. Fischer said in an interview on CNBC.

Mr. Fischer is a popular figure with the international central bankers. As a professor at the Massachusetts Institute of Technology, he was a mentor to many prominent economists around the world, and he spent eight years as the governor of the Central Bank of Israel.

"We all admire Janet Yellen very much," said Ewald Nowotny, a member of the European Central Bank's governing council. "We admire and also love Stanley Fischer, who is really a role model for many of us. But no comment on Fed appointments."