Despite his pre-election criticism of the Federal Reserve, Trump is reviewing candidates to replace Janet Yellen as Federal Reserve Board Chair who have views very similar to hers on the regulator’s immediate objectives.*
For quite a long time now, appointment of the Fed chair has not been a sweepstakes. After the “musical chairs” experience in the late 1970s, the Fed is only on its fourth chairman in almost 40 years. Paul Volcker and Ben Bernanke served for eight years each, and Alan Greenspan stayed at the helm for a full 20 years. (The results of his activity will stand for a long time as an argument in favor of the leadership turnover of the world’s major central banks.) With a president less inclined to make change than Trump, the extension of Yellen’s term would have been announced a few months ago. But the Fed was the subject of criticism during and after the election, so there could not be an automatic reappointment, and the process of finding a candidate as a replacement was delayed.
In addition to Yellen, the president confirmed that Fed chair candidates under consideration are John Taylor (former deputy chief of the International Monetary Fund, guru of international finance, and Stanford professor), and Jerome Powell (member of the Federal Reserve Board of Governors and experienced banker). Naturally, the possible options are of great interest among market participants. A decision is expected to be made by Nov. 3.
Although the Fed chair does not formally have authority, the chair determines the agenda of the Fed meetings and has the right to speak to Congress. The Fed chair is certainly an influential figure. According to decades of unwritten rules, the Fed chair plays a pivotal role in determining monetary policy and specific measures for overcoming financial crises. At the same time, the Fed is a sufficiently inert organization. Appointments to the Board of Governors and management of district reserve banks are separated by time, resulting in the sustainability of approaches to market actions. Furthermore, the need to approve a new Fed chair in the Senate, in the absence of a consensus inside the Republican majority, limits the choice of candidates. Among other things, that is why extremely radical or authoritative candidates like the head of JP Morgan Chase, James Dimon, or Bernanke’s comrade-in-arms, Kevin Warsh, have disappeared from the conversation. Moreover, the work of all the possible candidates on Wall Street or in elite universities largely predetermines their views and reduces the odds of a radical change in policy.
Even for economists outside a very narrow circle of specialists in monetary policy, Yellen and Taylor are viewed as nearly indistinguishable; the differences lie only in nuances. The independence of the Fed, the responsibility to actively intervene in the situation of the market, and support the stabilization of banks are, as the Russians say, “systematically significant.” The fact that one is closer to the Republicans, and the other is closer to the Democrats, doesn’t play a special role. The consideration of Powell, as part of Obama’s deal with the Republicans, shows that his views are also mostly in line with the consensus.
The Likely Scenario
Most likely, we will not see particularly sharp movements. Expect a difference in style and tone, but not in substance. The agenda for years to come was mostly determined by the actions of Bernanke and Yellen. If Yellen is appointed for a new term, one of the two different candidates will most likely become her first deputy to replace Stanley Fischer, who is retiring. A reduction in the Fed’s balance sheet will most likely go rather slowly, as well as raising interest rates. This is due to 10-year all time low consensus rates, extremely low inflation and the eternal nightmare of any Fed Chair – a repetition of the Great Depression. As we know, unlike the European Central Bank or the Bank of England, the Fed has a mandate to support economic growth. The Treasury Department will play an essential role in determining domestic economic policy with plans for tax reform, which could lead to an increase in the budget deficit. For emerging markets (including Russia, despite the sanctions), strong economic growth in the U.S. against a background of very moderate tightening of financial policy is a plus, and will heat up demand for assets and commodities.
Don’t expect large changes in the area of regulations; Congress is unlikely to give this topic significant attention. Ironically, the system of financial supervision in the U.S. is quite archaic, politicized and split on an industry-wide basis. The extent of coordination between financial regulators lags significantly behind the standards of other developed and developing countries. Ideas for creating a “megaregulator” (independent or based out of the Fed) pop up regularly, but are played out by both the financial industry and politicians. Created after the financial crisis in 2008, the Bureau of Consumer Rights at the Federal Trade Commission is on the list of those taking shots at the Trump administration.
At the same time, increased concentration of the U.S. banking system – the four largest banks have grown to make up 40 percent of deposits and 42 percent of assets over the past 10 years – requires an improvement in the quality of supervision. But here, we will observe inertia.
*Editor’s note: President Trump nominated Jerome H. Powell to chair the Federal Reserve on Nov. 2, 2017, after this article was published. The editors feel that the analysis in this perspective remains relevant.