How Will Trump Remake the Federal Reserve Board? | The Weekly Standard

How Will Trump Remake the Federal Reserve Board? | The Weekly Standard.

By Irwin M. Stelzer The Weekly Standard · September 18, 2017
There are (at least) four Fed vacancies for the president to fill.
And then there were four. Vacancies on the Federal Reserve Bank’s seven-person board of governors, that is, now that vice-chair Stanley Fischer has tendered his resignation for “personal reasons”—widely believed to be his wife’s health.

So here’s the state of play: Current Fed chair Janet Yellen’s term as governor doesn’t expire until 2024, but her stint as chair ends on February 3 of next year. If not reappointed, then Yellen almost certainly will resign her governor’s post.

So President Trump has an opportunity to reshape the board to his own purposes. With Fischer gone, and if Yellen leaves, five of the seven seats at the central bank’s table are

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Federal Reserve chair Janet Yellen testifies at a Senate Banking Committee hearing in Washington, D.C., July 13, 2017. (Getty Images)
And then there were four. Vacancies on the Federal Reserve Bank’s seven-person board of governors, that is, now that vice-chair Stanley Fischer has tendered his resignation for “personal reasons”—widely believed to be his wife’s health.

So here’s the state of play: Current Fed chair Janet Yellen’s term as governor doesn’t expire until 2024, but her stint as chair ends on February 3 of next year. If not reappointed, then Yellen almost certainly will resign her governor’s post.

So President Trump has an opportunity to reshape the board to his own purposes. With Fischer gone, and if Yellen leaves, five of the seven seats at the central bank’s table are Trump’s to fill. That does not give him complete control over how monetary policy will be made, since the monetary policy committee (technically, the Federal Open Market Committee, or FOMC) includes, in addition to the seven governors, five of the twelve presidents of the regional federal reserve banks.

And, of course, any nominee must be confirmed by the Senate, which at the moment is refusing even to consider almost 300 Trump nominees to various federal posts.

So much for this tutorial, the bottom line of which is that Trump holds almost all the cards, and is deciding how to play them. His goals seem to be twofold: to appoint men and women who (1) have a bias towards keeping interest rates low, and (2) want to unwind some of the regulations put in place during the financial crisis, most notably the Dodd-Frank law.

That first goal is a common one both for politicians (who worry less about inflation in the long-run than about slow growth in the short-run) and for heavily-indebted property developers (who need low interest rates to minimize the burden of their indebtedness). The person who now occupies the White House and has the power to determine the characters who will be Fed governors for years to come fits both descriptions.

The second goal, minimal regulation, is favored by policy makers who believe that the current regulatory regime is being used by excessively risk-averse regulators to stifle lending by banks, and therefore slow the rate at which the economy can grow.

Trump’s chief economic adviser, Gary Cohn, lately of Goldman Sachs, is the cheerleader for the easing-regulation crowd—of which the president is a charter member and the exiting vice chair of the Fed Stanley Fischer is the most significant opponent. So Cohn and Trump are now rid of this meddlesome Fed governor.

Here is the betting in Washington, as practiced by risk-averse pundits who use words rather than cash to back up their choices: Janet Yellen will be reappointed as chair.

For a while that job seemed to be Cohn’s for the asking (and he would certainly ask) replacing a skilled economist with a more intuitive banker. Then, to his credit, Cohn disassociated himself from Trump’s declaration of the moral equivalence of Nazi thugs and peaceful protesters. Reports are that his comments pierced the president’s none-too-thick skin, and that the two men are now in a marriage of convenience—Trump needs Cohn to push through his tax cuts and Cohn wants to do that as a legacy act before returning to Wall Street. When Congress passes a tax bill, the marriage of convenience will be terminated. And Yellen has going for her a long policy of low interest rates that pushed share prices to record highs, a metric to which Trump pays as much attention as he does to job creation.

With Yellen back in the chair and remaining on the board, and existing governors Jerome Powell and Lael Brainard in place until 2028 and 2026, three places would then be accounted for. Trump has nominated Randal Quarles to fill one of the vacant seats, and serve the as first-ever vice chair for supervision, the regulatory role created by Dodd Frank, the law on which the president has promised to “do a big number . . . a major elimination of the horrendous [law]”. Quarles served in George W. Bush’s Treasury department, was a partner at the Carlyle Group, and is regarded as more pragmatist than ideologue—but one who says he would seek to “redefine” regulatory policy if confirmed. That makes four.

Trump’s next nominee is likely to be Marvin Goodfriend, a professor of economics at Carnegie-Mellon University. Professor Goodfriend has impeccable academic and conservative credentials, expertise in monetary policy, and an approach very much in line with that of most central bankers—making him a sound choice and a perfect substitute for Yellen should she manage to antagonize Trump between now and February. That’s five, leaving two vacancies, one of which will likely go to an expert in community banking.

When all the chairs are filled, we are likely to end up with two changes in policy. One will be an easing of regulatory constraints on bank lending and use of their capital. Which means allowing these too-big-to-fail and too-big-to-manage institutions (remember the $6.2 billion trading loss JPMorgan Chase sustained without any top executive knowing about it, and Wells Fargo’s fake customer accounts?) an opportunity to demonstrate they have learned something from the time when their reckless lending brought the international financial system to its knees and they begged taxpayers for a bailout.

The second change is likely to be more subtle: The Fed is raising interest rates and selling off some of the assets on its bloated balance sheet, but gradually. The new board is likely to convert “gradually” to “very gradually.”

Which will either step up growth by keeping interest rates lower for longer—or slow growth by creating inflationary fears that drive up interest rates. Such is the certainty offered by economic theory.

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