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Trading Lessons

Whoever Gets Appointed to the Fed, Expect Negative Rates and QE in the Next Crisis

Interest-Rates / Negative Interest Rates Aug 20, 2017 - 12:35 PM GMT

By: John_Mauldin

Interest-Rates

Janet Yellen’s current turn at the chair expires in February.

Who will be running the Fed next year, and will it matter? How will new leadership change anything?

Trump could renominate her but hasn’t yet announced a decision or even given a hint.


This is speculation, but President Trump had some kind words for Yellen in a recent Wall Street Journal interview.

Anonymous sources quoted in the media say Trump economic advisor and former Goldman Sachs executive Gary Cohn is also in the running. Other names come up, but those two are leading for now.

It Will Be Trump’s Fed

I am not sure what to make of President Trump’s generous remarks, especially after his less than laudatory remarks about the Yellen Fed during his campaign. Maybe wiser heads got to him and pointed out that she is going to be Fed chair through February.

We know President Trump admires successful business leaders. That might give Cohn an edge, since he was COO at Goldman Sachs.  But then again, appointing Goldman Sachs alum to the head of the Fed really doesn’t square with his campaign speeches.

It wouldn’t surprise me to see a “dark horse” emerge as the nominee.

Trump will get to fill at least six of the seven potential open seats by this time next year. No other president has been able to put his stamp this firmly on the Fed since Woodrow Wilson appointed the original Federal Reserve Board of Governors in 1913.

Trump’s nominees will control the Fed.  Good, bad, or indifferent, it will be the Trump Fed.

But Will It Matter After All?

Businesspeople think differently from economists. They pay attention to market signals rather than political criteria.

The Fed has over a thousand PhD economists on staff, and it's not at all clear that the combined weight of their expertise leads to better policy decision.

The bottom line on Yellen vs. Cohn: Both are tolerable. Markets might like Yellen better simply because she is at least a known quantity. Cohn might bring a different attitude and make personnel changes, but his impact wouldn’t show up in monetary policy for some time.

But there are more than a few people, including myself, who would prefer to see someone else appointed.

However, when I discussed Trump’s next two probable nominees to Randal Quarles, a Treasury Department official in the George W. Bush administration, and Marvin Goodfriend, a former Fed official who is now a professor of economics at Carnegie Mellon University) there was general agreement with me that those two names suggested there would not be a serious change in direction at the Federal Reserve Board next year.

And no matter who gets appointed and what they do, I doubt the choice would matter very much. The Fed’s policy course under Yellen will be hard for Cohn or anyone else to change.

So when the next crisis hits, you can expect more QE and perhaps even negative rates.

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Comments

HarrisD
20 Aug 17, 19:39
Next FED Chair and Looming US Recsssion

Dear John,

I follow your work, and got the chance to see you speak in person when you were at the Singularity conference in New York a few years back.

I think you are right, that who ever is the next FED chair will have to launch QE4 and we will see negative interest rates persist globally for some time to come. This might actually happen before Janet Yellen leaves in February, and here's why.

My analysis shows the likelihood of a significant US stock market top to happen soon. Either during the week of August 7-11 just gone (and we did get a top in the DOW) or during the four week window from August 28-Sept 22. After that the momentum in the stock market is likely to break down.

On top of that, a US recession is on the horizon. The longest the US economy had ever gone without a recession is 119 months. We will equal that record in May 2019, so the likelihood of a US recession starting in the next 21 months is very high. Even the chance of one starting before the end of December 2018 is high, since about 70% of US recessions start in the first two years of a new administrations 4 year term.

Other analysis going back 100 years on the DOW suggest that we are soon going to see a drop of between 14% and 29% very soon. The fact that a US recession is looming puts that most likely to be in the 20%-29% range. So that is a move into bear market territory for US stocks.

Many US stocks (especially tech stocks) are in technical bubble territory, so again all these bubbles have to burst and that will bring the US stock markets indexes down. Apple Inc. is one such stock (forming a massive multi-year 3 peak bubble, as we speak). The FANG stocks are also in a bubble. Bitcoin is in bubble. Bubbles typically need to drop between 30%-50% before they form a bottom, sometimes more. Stock markets in Venezuela and Argentina are also in a bubble, and they are soon to drop.

Yes indeed, QE4 and negative interest rates are very likely.

Cheers,

David


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