What Donald Trump's Shortlist For The Fed Chair Might Mean For Rates

President Donald Trump has reportedly narrowed his decision for Federal Reserve chair down to three people: current chair Janet Yellen, Stanford University economist John Taylor or former investment banker Jay Powell.

The Washington Post reported three Washington insiders have said Powell and Taylor are the two outside finalists for the position.

Fed policy is a critical part of the investment equation, so understanding what (if anything) could change in the Fed’s direction in 2018 is extremely important.

Yellen Still In The Mix

In the past, Yellen seemed extremely unlikely to remain in her position. During the 2016 campaign season, Trump said Yellen should be “ashamed of herself” for Fed policy during her regime. However, Trump is prone to changing his mind and seemed to have softened his stance on Yellen in an April 2017 interview with the Wall Street Journal.

"You know, I like her … I do like the low-interest rate policy," Trump said.

Related Link: Trump Said If Rates Go Up, It Won't Be Pretty; Market Still At All-Time Highs

Obviously the least disruptive decision Trump could make for investors would be to leave Yellen in place to continue her approach of cautiously and slowly raising interest rates.

The 2 Challengers

If Trump chooses to go in a different direction, Powell would likely make for a smoother transition. In the past, Powell has shared Yellen’s attitude of erring on the side of caution when it comes to monetary policy.

“Markets should take a Powell announcement largely in stride, keeping financial conditions easy and providing little disruption to an economy that is experiencing solid growth,” Deutsche Bank wrote Monday.

Taylor, on the other hand, is generally considered to be more hawkish on policy and could advocate for a faster, more aggressive rate hike schedule.

Bloomberg’s Michael McKee tweeted on Friday that Powell is the favorite in the race.

However, if Trump decides to go with Taylor, stocks and other assets that typically correlate with higher rates could be on the move.

How To Play It

For investors betting on a Taylor Fed, the S&P Metals and Mining (ETF) XME is a decent play on a strong historical correlation between mining stocks and interest rates.

Bank margins also typically get a boost by higher rates, making the Financial Select Sector SPDR Fund XLF another potential option.

Finally, the most direct play on rising rates is The Sit Rising Rate ETF RISE, an ETF designed to produce a 10x levered return on interest rates.

Related Link: 3 Ways To Trade The Fed Rate Decision