Possible Trump Fed chair nominee John Taylor scares the market


Getting the Fed leadership right will be critical for Trump as he tries to push the economy to 3 percent growth.

“The more difficult problem over the next few years is where are we going with the economy and with Fed policy,” QMA’s Keon said. “The reality is that no matter who gets the job, there will be some substantial challenges over the next few years.”

Among those will be figuring out what “normal” policy will be after $4.5 trillion of quantitative easing and seven years of zero interest rate policy, as well as how the Fed’s monetary policy and Congress’s fiscal moves will mesh. The White House is pushing an aggressive tax reform and deregulation agenda that it believes will pull the economy out of its post-crisis funk.

“With the unemployment rate pretty low, it’s possible that you could get additional stimulus on top of an economy that’s already fairly close to full capacity and push us into overload mode,” Keon said. “If that happens, the Fed will have to decide whether to act quickly to avoid overheating and bubbles, or let things run a little bit toward what Janet Yellen referred to as a ‘high-pressure economy.'”

Collectively, the market is anticipating that Taylor would be more likely to put the brakes on an expansion.

However, he has said that while he favors a rules-based approach, the Fed simply would have to articulate its reasons should it decide to veer from the Taylor Rule.

His perceived hawkishness, though, might be enough to generate the same fear from Trump as is in some corners of the financial markets.

“You could look at John Taylor as someone who is going to raise interest rates a lot more than Janet Yellen and at least cause the economy to slow down and maybe cause a recession during your presidency,” Princeton economist Alan Blinder told CNBC, “and a lot of presidents don’t like that very much.”

WATCH: One strategist makes the case against Taylor for Fed chair.

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