Fed Watch: Trump versus the doves

11-15-2016

Donald Trump’s surprise election victory has raised speculation about Federal Reserve policymakers as much their actual policy. Even as we approach a Federal Open Market Committee (FOMC) meeting that we think likely will result in only the second rate hike in eight years, the talk has shifted to the job security of Fed Chair Janet Yellen and the composition of the Fed board in general under a Trump administration.

President-elect Trump was openly critical of Yellen during the course of the campaign, saying she should be ashamed of herself for not raising rates just because the Obama administration didn’t want her to. That sparked thought that Trump will fire her when he gets into office. But the reality of the situation is much more complex than that.

First of all, Yellen’s term extends through January of 2018. She can’t be forced out until the end of that time, absent some true ugliness. However, the president can, and likely would, replace her at that time instead of retaining her for another term. Conversely, Yellen could resign at any point, but in our view that is not likely. Trump’s camp recently said Trump views Yellen as being competent, that the Fed is independent and that she can’t imagine why Yellen would not serve out the remainder of her term. I think these comments reflect a new understanding that a changeover in Fed leadership at this very moment could be quite unsettling to the market at large at a time when the markets already have considerable uncertainty ahead.

Yellen aside, however, Trump will have the opportunity to have a significant influence on the composition of the Fed next year. There are two open positions on the board of governors, including a newly created vice chairman of supervision, and Fed governor Lael Brainard’s term expired earlier this year. Trump should have no trouble filling these positions given the Republican control of Congress. Furthermore, he and other hawkish Republicans will want to do so soon as the 2017 Fed, with the rotation of four new regional Fed bank presidents, will be notably more dovish. It is widely assumed that Trump’s Fed choices could go a long way toward offsetting that overall dovish tilt, potentially having a substantial impact on U.S. monetary policy in the coming years.