WASHINGTON, D.C. – According to sources, says financial network CNBC, Trump is set to interview current chair of the Federal Reserve as he considers her reappointment to the post.
It is typical for a newly elected president to reappoint the sitting Fed chair for many reasons, not least of which is continuity for financial markets. This time around, however, is quite different as Trump ripped into Yellen on the campaign trail for being overly “political.”
Trump’s contention was that Yellen was slow rolling interest rate increases in order to placate markets and improve the electoral chances for incumbent Democrats. Although Obama was not running for re-election, Hillary Clinton had been a key figure in his administration and following the preset forecasts on interest rate hikes might have upset markets, leading to paper losses in voters’ 401(k) portfolios and damage pro-Democrat regime sentiment.
Since the campaign Trump has had nicer things to say of Yellen, and now is interviewing her to remain in her post. Her interest in staying on, though, may be a different matter altogether.
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The Federal Reserve is designed to be insulated from politics when it comes to its policy decisions, but that doesn’t mean the Fed’s actions have no effect on politics. Indeed, the Fed has a track record of inflating asset bubbles up until the point that they inadvertently deflate them, exacerbating economic woes and causing market turmoil that easily bleeds over into political sentiment.
It could be argued that the Fed’s emergency actions and unprecedented monetary policies in the aftermath of the 2008 financial crisis papered over the issues that led to 2008 and avoided any meaningful closure or solutions to the conditions that enabled the crisis. Rock bottom interest rates and massive asset buying programs known as quantitative easing enabled markets to float up through 2012 and beyond.
Was the Fed being political as it continued these policies through the 2012 presidential election season and protecting then-President Obama from facing another market downturn during the race? Probably not.
Instead, and just as worrisome, the Fed has become beholden to market sentiment and, vice versa, the market has become beholden to extraordinarily easy monetary policy ever since the crisis.
Yellen has presided over the most pronounced period of the Fed’s market sensitivity, telegraphing every minute move or word change in policy reports so as to not ‘rock the boat’ of financial markets.
Investors refer to this reality as the ‘Central Bank Put’ – a floor under the market provided by the Federal Reserve. Super low interest rates send portfolio managers searching for yield and the trend results in capital piling into the only markets that provide any yield, namely equity and bond markets.
Yellen and company have made sure that floor is solid for fear of what falling markets could mean for the financial system, no matter that market gains are not part of the Fed’s mandate and no matter what economic indicators suggest about prudent policy decisions.
Trump should not reappoint Yellen to the position if he is truly interested in breaking up the status quo. Other candidates like his senior economic adviser Gary Cohn or current chair of Minneapolis reserve bank Neel Kashkari would be suitable replacements that may maintain the market’s confidence.
But Trump has exhibited a taste for rebels that strike out against the status quo, shake things up, and help poke holes that ‘drain the swamp’ that is Washington D.C.. There are a couple names on Trump’s short-list for Fed chair that fit such a mold, but none more so than Kevin Warsh.
Warsh has been criticized by a diverse group of stakeholders for reasons that may actually endear him to Trump. He cuts against the grain and is not afraid of bold decisions.
Warsh’s chances are said to be fading lately, while Stanford economist John Taylor chances have risen after he reportedly impressed the president during their hour long interview recently.
Trump has indicated he would now like interest rates to stay low, likely of the key role low rates play in elevating an ever rising stock market. Neither Taylor, nor Warsh, are likely to keep interest rates at such low levels due to seemingly improving economic factors. But don’t be surprised if Trump’s ultimate selection for the next Fed chair is a rebel in monetary terms who will introduce a change in direction at the central bank.