If somebody had suggested a year ago that Gary Cohn, former Goldman Sachs president, might be the next Federal Reserve chair, his colleagues would have guffawed. Mr Cohn might have chuckled too.
After all, Mr Cohn, 56, has built his career by navigating the markets with skill, and wielding power with ruthless efficiency. But he has never presented himself as a soaring intellect or economic expert. Indeed, he sometimes jokes that he only scraped through college by using ferocious willpower (he is dyslexic) and got a job on Wall Street by hustling hard (he comes from a blue-collar background and had to fight for every chance).
But these days Washington is a peculiarly unpredictable place. So it is perhaps fitting that there are rumours that Donald Trump plans to remove Janet Yellen from her post as Fed chair when her term ends next year, and install Mr Cohn, the White House chief economics adviser.
Who knows whether this will occur. Mr Cohn has at least one key rival: Kevin Warsh, a former Fed governor and fund manager, who sits on Mr Trump’s business advisory council. Names such as the economists Greg Mankiw and Glenn Hubbard have been tossed around too. And it is possible that Mr Trump will eventually perform a volte face and decide to keep Ms Yellen after all.
But as the rumours swirl, there are three points that investors should remember. First, and most obviously, the saga shows that it is a mistake to analyse the workings of the White House through the lens of conventional government deliberation.
Previous administrations have started hunting for a new Fed chair a year before the term ends to prepare the markets, and have announced a decision soon after Labor Day. But this time, the process and timing are uncertain.
Some Fed watchers think Mr Cohn’s name has popped up because he wants to leave the White House. Others suspect Mr Cohn wants to replace Reince Priebus as chief of staff, but that his rival Steve Bannon, Mr Trump’s chief strategist, is trying to push him out. What is more, the person supposedly running the Fed search process is none other than Mr Cohn himself.
Either way, the only way to make sense of this is to visualise the White House not as a government bureaucracy but as a royal court, with a capricious king surrounded by jostling courtiers. Predicting the outcome of the Fed search is as hard as it would have been to guess who Kings Henry VIII of England or Louis XIV of France would appoint as their next bishop.
This highlights a second point: the Fed’s future is highly uncertain. If Mr Warsh becomes chair, we would have some sense of what he might do, since he has recently given speeches calling for reforms to the Fed’s communications strategy, corporate governance and policy approach. He wants to focus less on inflation forecasts and more on underlying issues such as productivity.
Mr Cohn’s plans, meanwhile, are a mystery. He spoke last year at the Global Financial Leadership conference in Florida and acknowledged that “the Fed is in a really tough spot” because global markets are so tightly interconnected that “we have successfully globalised the world” and monetary policy.
“We have a global growth issue and we are trying to solve it with domestic policy,” he added, warning that “it’s not going to work”. This suggests that Mr Cohn would run Fed policy with the same pragmatism that has dominated his career, relying more on his market expertise than macroeconomic models. Whether that makes him a dove or hawk is anybody’s guess.
And that highlights the third crucial point: if nothing else, this drama is a slap in the face for the high priests of economics. In recent decades it has been widely assumed that central banks must be run by people with economics PhDs. But neither Mr Cohn, nor Mr Warsh, has this pedigree. Maybe this is no bad thing: an obsession with macroeconomic models left central banks dangerously blind to the credit bubble a decade ago. Having a Fed chair who has markets experience might be sensible, given that there is a good chance we will see some big financial shocks in the coming years as quantitative easing is unwound.
But would Mr Cohn, or Mr Warsh for that matter, be able to create a workable consensus inside the Fed? Could they protect its all-important political independence amid fiscal stress or political turmoil? That is unclear. The only thing we know is that if Mr Cohn’s candidacy advances, there will be howls of fury from the economics profession. Investors be warned: the cosy elite consensus of recent years is crumbling, and not even the Fed is immune.
