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.
