Trump prepares to announce conservative picks for Federal Reserve

President Donald Trump may be preparing to announce the names of two of his nominees for the Federal Reserve’s Board of Governors, multiple reports from Washington claim.

The Trump administration has yet to deny press accounts from numerous trusted sources that the president selected Marvin Goodfriend and Randal Quarles as nominees for two of three open positions at the Fed. Though subject to Senate confirmation, Goodfriend and Quarles would represent a significant departure from the status quo at the United States’ central bank.

Currently, the board’s four members are generally considered to be liberal. Chair Janet Yellen is seen by many as the most left-wing chair the Fed has ever had.

Quarles, currently managing director at The Cynosure Group, a private equity firm, is a former financial industry lawyer as well as secretary for domestic finance and secretary for international affairs under former President George W. Bush.

Quarles’ appointment would be particularly significant, as he would replace Daniel Tarullo, a former Obama administration appointee. Some called him "the Wizard of Oz" due to his perceived power prior to his resignation in April. Though he was never officially nominated as the vice chairman of supervision, he acted as the de facto for the position.

Ed Mills, a policy analyst at FBR Capital Markets, said in a February research note that “Tarullo is arguably one of the most powerful U.S. banking regulators since Alexander Hamilton.”

Tarullo was a champion of financial regulation during the Dodd-Frank Era. During his time at the Fed, Tarullo spearheaded efforts to require banks to undergo an annual stress test, designed to assess banks’ ability to continue operations when on the brink of crisis, as well as calling for greater capital requirements for the biggest U.S. banks.

Quarles, contrarily, has been highly critical of many of the regulations put in place since the 2008 crisis. During an interview with Bloomberg Television in 2015, he said that some of the changes in regulation fostered during the Obama administration “aren’t well designed and were included for political rather than financial-regulatory reasons." They are generally seen as  considerably more supportive of Wall Street than his predecessor's.

One of the most interesting dynamics is the possible relationship between Quarles and Yellen. If Quarles is confirmed as vice chair for supervision, one of his most significant responsibilities would be the oversight of the yearly stress tests administered to banks. However, his ability to affect change would be limited, as Yellen was a major proponent of the tests, as well as other regulations seen as overly constrictive by many of Wall Street’s top CEOs.

Yellen’s term as Fed chair is up next year and it will be interesting to see if she chooses to continue her term on the board of governors, which expires in 2024, or resign as is the norm.

Trump’s other rumored nominee, Goodfriend, is no stranger to the Fed. He was an economist at the Federal Reserve Bank of Richmond for more than 20 years, over 10 of which were spent as the chief monetary policy adviser to the bank’s president.

Goodfriend is a well-known conservative who has had many of the same critiques of the Fed’s policy as his fellow rumored nominee.

One issue that they have both spoken out against is the lack of concrete guidelines for policymaking at the Fed under Yellen. She has favored a wait-and-see approach, adjusting her strategy based on her opinion and that of the board. Both Goodfriend and Quarles have come out publicly in support of a more empirical basis for policymaking decisions. This is a sentiment shared by House Republicans who have proposed a bill that would require the Fed to establish a more formulaic approach to interest rate adjustment.

Goodfriend has also spoken out against the Fed’s asset purchasing program.

Of the over $4 trillion of assets added to the Fed’s balance sheet post crisis, mortgage backed securities constitute just under half of that total. Goodfriend has argued that the concentration on MBS purchasing disproportionately promotes growth in this particular sector. His opinion is that a determination should be made by those who are in charge of fiscal policy, not monetary policy.

If Goodfriend and Quarles are confirmed, Trump would still have at least one more vacancy to fill. If Yellen chooses to resign in 2018, Trump could have the opportunity to appoint a majority of the governors on the board, including the chairperson. Such an opportunity would make way for the sweeping reforms to financial regulation promised by the Trump administration on the campaign trail.