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With three open governors’ seats, in addition to the Chair’s and Vice Chair’s, President
Trump has the opportunity to materially shape the FOMC within the next year.
Advisers close to the president have favoured a rules-based approach, while President
Trump has made clear that he “like[s] a low-interest-rate policy”.
While we think a monetary policy outsider, such as former Goldman Sachs president Gary Cohn is a distinct possibility, we do not think the path of rates would change significantly.
President Trump has the chance to shape the Federal Open Market Committee (FOMC) more than any president since Reagan. Of the seven seats on the Fed’s Board of Governors, three are vacant, in addition to the Chair and Vice-chair posts that are set to expire before the end of 2018.
All told, in the next two years, five of the seven Fed governors could be appointees of
President Trump, including the next Chair and Vice Chair. While the Committee’s dynamic will likely change given this turnover, we think the path of rates will not change significantly. President Trump has nominated Randal Quarles, a former Treasury official and private equity investor, to fill one of the three empty governor seats and as the Vice Chairman of Supervision.
While there are still two remaining seats at the table, Trump will have to either nominate
candidates that will be the future Chair or Vice Chair, or select someone who is an existing governor for those posts if he wants to fill those governor seats in the near term. Notably, while their respective posts as Chair and Vice Chair expire in 2018, Janet Yellen and Stanley Fischer’s terms as governors end in 2024 and 2020, respectively.
We see two avenues through which Trump’s choices for governors could alter the FOMC. The first is the dynamics of monetary policy decision-making and the second is in the Fed’s reaction function.
In terms of the process of monetary policy decision-making, the next Fed Chair is likely to create a new dynamic; whether it is via a new “core” group of Committee members or driven more by the Chair him or herself. Paul Volcker (1979-87) and Alan Greenspan (1987-2006) were big personalities who drove their committees, making their views well known and showing little tolerance for dissent.
Ben Bernanke (2006-14) and Janet Yellen (2014-present), on the
other hand, have taken a different approach by relying on a group of “core” members.
For Bernanke, his core was Yellen, Dudley and perhaps Lockhart, while Yellen has relied on her alliance with Dudley and Williams. With the likelihood of a new Chair and Vice Chair being appointed by President Trump and NY Fed President Dudley set to retire in 2019, the “core” of the FOMC will likely change. Whether the new Chair governs the committee in a Volcker/Greenspan-like (individual) fashion or a Bernanke/Yellen-like (core/consensus) fashion, the dynamics of decision-making for the FOMC will undoubtedly be altered.
In terms of the Fed’s reaction function, we do see some scope for a shift. The most likely
adjustment could be movement towards a rules-based approach to monetary policy. Strictly speaking, a monetary rule would take more of the individual judgment out of monetary policy decisions. If the Fed were to move to a more rules-based approach, we think this would serve more as a guideline than hard and fast rules.
The current frontrunners for the top job at the Fed seem to be: Gary Cohn, Janet Yellen, Kevin Warsh, Glenn Hubbard and John Taylor (and perhaps a whole host of wild-card candidates). In our view, the odds currently favour Cohn and are fairly split between Yellen, Warsh and Hubbard, or a wild-card candidate (including Taylor). While there is a limited record of Cohn’s public comments on monetary policy, available evidence suggests he might be more dovish than Yellen. In 2015, he questioned her for preparing to hike rates, saying she had “no legitimate argument to raise rates without inflation being close to – or having some inkling that it’s approaching – 2 percent.”