Investing.com – In a preliminary report on possible outcomes for the U.S. elections released on Wednesday, Morgan Stanley (NYSE:MS) evaluated the possible impact the results could have on the Federal Reserve (Fed) chair Janet Yellen and examined possible replacements.
These experts used a mix of polling data to point to the four most likely outcomes, all of which included the base case that the Republicans would maintain control of the House, and concluded that they were, in order of likelihood:
1. Hillary Clinton wins the presidency along with a Democratic Senate.
2. Clinton wins the presidency but with a Republican Senate.
3. Donald Trump wins the presidency with a Republican Senate.
4. Trump wins the presidency with a Democratic Senate.
In the most likely cases, Morgan Stanley expects Janet Yellen to be reappointed when her four-year term as Fed chair expires on February 3, 2018
“Historically, the President of the United States has opted for continuity regardless of whether political views align,” these experts pointed out.
As examples, Republican President Ronald Reagan kept the Democrat-appointed Paul Volker, while Democratic President Barack Obama opted to hold on to the Republican-named Ben Bernanke.
However, Morgan Stanley did note that Trump remarked back in May that he would most likely nominate someone more aligned with his political stance, although he admitted that Yellen was a “very capable person”.
“(S)he’s not a Republican. When her time is up, I would most likely replace her because of the fact that it would be appropriate,” he said in the interview with CNBC.
In any case, “neither (presidential) candidate has thrown any names into the ring,” Morgan Stanley explained in the report.
In either case, if Yellen is not reappointed and no replacement is named, Fed vice chair Stanley Fischer would preside over the U.S. central bank until a new chief is appointed.
“On the short list of next Fed chair candidates could be Larry Summers (former World Bank chief economist and U.S. Treasury Secretary) or Lael Brainard (currently on the Fed Board of Governors) if Hillary Clinton is the next President, though we think it is most likely that she would stick with Yellen,” these experts said.
In the case of a Trump victory, Morgan Stanley suggested that Glenn Hubbard, former chairperson of the Council of Economic Advisers for then-President George W. Bush, could be chosen if he was not given the U.S. Treasury Secretary position, John Taylor who created the famous “Taylor rule”, or Douglas Holtz-Eakin, former director of the Congressional Budget
Office and chief economic policy adviser in John McCain’s 2008 presidential campaign.
“Donald Kohn - former Vice Chairman of the Board of Governors and moderate in his policy stance - could be considered by either Hillary or Trump,” they added.
“We must also consider the fact that at this point the business expansion is now the 4th longest post-WWII expansion on record and it is increasingly possible the next chair of the FOMC could preside over a recession, which could either raise the chance that the desire for little policy disruption during a time of uncertainty results in a reappointed Yellen, or that a new leader comes in but is forced to keep policy accommodation in line with current levels,” these analysts concluded.