Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Who Will Be the Next Fed Chief - And Why It Matters 

Interest-Rates / US Federal Reserve Bank Oct 16, 2017 - 12:56 PM GMT

By: Dan_Steinbock

Interest-Rates Janet Yellen's term is ending at the Federal Reserve. With new appointments, President Trump can indirectly shape US monetary policy for years to come - for better or worse. 

Serving as the “epitome of calm,” Fed chief Ben Bernanke responded to the global financial crisis by cutting the federal funds rate to zero and initiating rounds of quantitative easing (QE) soon thereafter.


When Janet Yellen replaced Bernanke in 2014, U.S. economy had begun the exit from zero-interest-policy-rates (ZIRP) but not balance sheet normalization.

As Yellen’s term will end on February 2018, President Trump will soon select the next Fed chief and several new members of the Fed Board. Consequently, Trump will indirectly shape U.S. monetary policies for years to come.

Not surprisingly, Trump has been assisted by Vice President Mike Pence, who has met with outside advisers – including Heritage Foundation economist Steve Moore, conservative economist Larry Kudlow and former President Ronald Reagan economic adviser Art Laffer – to assess the criteria for the next Fed leader.

Trump’s current shortlist features half a dozen viable candidates. In line with his “America First” approach, Trump is likely to ignore the international implications of the next Fed chief. Nor has he any interest in the Phillips curve that has influenced Yellen’s monetary stance.

Instead, Trump is likely to choose a candidate that will not prove too independent and who will prioritize Main Street, not Wall Street – and one that will support his proposed fiscal expansion.

Monetary hawks

The Fed has a dual mandate to maintain stable prices and full employment. Monetary “hawks” tend to stress prices at the expense of jobs, whereas “doves” tend to focus on jobs at the expense of prices.

Both Yellen and Bernanke are academic experts of the Great Depression. As a Keynesian economist and monetary dove, Yellen has been cautious with the pace of normalization. The Fed shortlist features several Wall Street insiders who have been seen as frontrunners. Such assessments underestimate Trump’s suspicions about Wall Street.

Kevin Warsh is a “hard money hawk” with close ties to Wall Street. Married with the $2 billion heiress Jane Lauder, his father-in-law is Ronald Lauder, a longtime friend of Trump. After serving as Morgan Stanley’s M&A executive, Warsh was President Bush’s director of the National Economic Council. At just 35 years old, he became the youngest appointment in the Fed.

Like Greenspan, Warsh is an ultimate free-market advocate. In 2007, less than a year before the rescue of Bear Stearns, he argued that financial innovation made the system safer. During and after the 2008 crisis, Warsh served as a governor of the Fed and its primary liaison to Wall Street. As US economy fell into deflation, he kept predicting that inflation would rise.

More recently, Trump met Stanford’s John B. Taylor, an accomplished academic of monetary economics. Taylor believes that the global crisis was caused by flawed macroeconomic policies in the U.S. and elsewhere. Under Alan Greenspan, the Fed created "monetary excesses." Interest rates were kept too low for too long, which led to the housing boom.

Unlike Bernanke and Yellen, Taylor has long cautioned the Fed should move away from quantitative easing measures and opt for a more stable monetary policy. If Warsh is a monetary hawk, Taylor is a monetary conservative.

Gary Cohn is Trump’s Director of the National Economic Council and his chief economic advisor. Unlike Warsh and Powell, Cohn is a registered Democrat. As former president and COO of Goldman Sachs, he is considered aggressive and arrogant. But unlike his rivals, he supports reinstating the Glass-Steagall legislation, which would separate commercial and investment banking.

Monetary doves

After law school, Fed governor Jerome Powell worked as an associate for an investment bank and private equity giant Carlyle Group. He served as an assistant secretary and undersecretary of the Treasury under President George H. W. Bush.

Unlike his rivals, Powell is not a PhD-trained economist, but his grasp of monetary economics is highly regarded. He has solid Republican credentials and is seen to represent institutional continuity. He is believed to be Treasury Secretary Steven Mnuchin’s preferred candidate and Trump’s current favorite. Unlike Warsh or Taylor, Powell believes in a more dovish monetary stance.

Trump could also opt for the incumbent Fed chief Janet Yellen. While in the past he has criticized some of Yellen’s actions and her Democratic legacies, he has also announced that he is a “low interest rate person” like Yellen.

Yellen continues to believe in the modern Phillips curve, which sees an inverse relationship between unemployment and inflation. Historically, a short-run tradeoff between unemployment and inflation reflected the postwar Keynesian era when rates climbed from 2% in the 1950s peaking at 20% in early 80s. In the past three decades, rates have shrunk to zero, however.

In light of the Phillips curve, decreased unemployment should go hand in hand with higher rates of inflation. Since unemployment rate is only 4.2%; that should translate to rising inflation. Yet, that has not been the case. Job growth is no longer accompanied with wage growth.

Fiscal expansion vs Fed’s normalization

In his Crippled America (2015), Trump argued that “our airports, bridges, water tunnels, power grids, rail systems; our nation's entire infrastructure is crumbling, and we aren't doing anything about it." As a result, fiscal expansion – a $1 trillion dollar infrastructure plan – is a central tenet of the Trump agenda.

To raise capital, Trump has hoped to create an infrastructure fund supported by government bonds, similar to “Build America Bonds.”

When Trump first developed his infrastructure plan, interest rates were close to zero. But as the Fed is normalizing - about to hike up the rates and exiting from quantitative easing – the plan will be a lot more expensive to execute.

"If we raise interest rates and if the dollar starts getting too strong, we're going to have some major problems,” Trump warned already in summer 2016. That is now the reality. He can no longer rely on the Fed to ease and thus to monetize the debt issuance. Conversely, aggressive infrastructure modernization could slow rate increases, or keep them lower.

Moreover, the Fed’s rate hikes tend to strengthen the dollar, while Trump’s debt tsunami would weaken it. Despite the rhetoric of normalization and strong dollar, Trump needs low rates and weak dollar, while the Fed is raising rates and boosting the dollar.

The role of equities and bond yields

Trump cannot mitigate the realities of normalization, but he can slow its pace by selecting a monetary dove. In this view, neither Warsh nor Taylor will do. The former would make Trump’s fiscal expansion prohibitively costly; the latter’s penchant for conservative stability would undermine infrastructure debt-taking.

That leaves Cohn, Powell and Yellen. However, Cohn and Yellen are Democrats, Powell is not.

After a September report that Trump had met with Warsh, stocks fell slightly before recovering, while Treasury bonds saw a significant sell-off and yields rose. It was foretaste of the kind of yield pricing that would undermine Trump’s fiscal expansion.

From the White House’s standpoint, a monetary hawk would hurt equities while boosting bond yields. In this view, the appointment of Powell – or even Yellen – would mean continuity, support equities while keeping bond yields low (Figure).



That would be in line with Trump’s fiscal plans.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

© 2017 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules