US: President may make a large number of Fed appointments over the next year - NAB

An issue to watch is the make-up of the Federal Reserve (Fed) as The Fed is responsible for monetary policy which itself has a strong influence on global financial conditions and interest rates, explains the research team at NAB.

Key Quotes

“The Fed is run by the Federal Reserve Board made up of seven Governors appointed by the President, but subject to confirmation by the Senate. The seven Governors are voting members of the FOMC – which sets monetary policy – as is the head of the New York Federal Reserve and four other positions rotated around the other regional Fed presidents.”

“There are currently three vacancies on the Board. This could swell to five if Janet Yellen and Stanley Fischer are not reappointed as Fed Chair and ViceChair respectively; their terms in these positions will expire in early February and June 2018 respectively. If not re-appointed as Chair/Vice Chair they could opt to serve out their terms as Governors (Yellen to 2024, Fischer to 2020) but would probably resign.”

“This means up to five of the 12 voting members of the FOMC, and the roles of Chair/Vice Chair could be nominated by the President over the next year.”

“While making some critical comments of the Fed and its Chair in the election campaign, the President’s recent comments have been more supportive of Ms Yellen, indicating that she is in the running for re-appointment as Chair. However, he has also indicated that Gary Cohn, Director of the National Economic Council is also being considered as are other candidates. Mr Cohn has a business rather than academic background (he would be the first Chair without a Ph.D. since Volcker in the 1980s) but is no stranger to the financial system given his former position at Goldman Sachs.”

“The President has nominated Randal Quarles to fill one of the existing Governor vacancies, specifically for the role as Vice Chairman for Supervision. This role has a prudential/supervisory focus consistent with his background, so he may not be a key factor in monetary policy debates. There was also speculation that the President would nominate Marvin Goodfriend, a monetary economist, but no announcement has been made.”

“Meanwhile expectations of further increases in the Fed funds rate have been falling, even as the Fed has been lifting rates. Expectations of rate hikes started rising after the election and peaked around mid-March but have since declined. Part of this relates to the unwinding of the Trump trade as market expectations of a major fiscal stimulus have unwound. It’s not all Trump related, since mid-April inflation indicators have softened noticeably. If a stimulatory tax package is implemented some upwards shift in rate expectations seems likely, but inflation would also have to pick up to fully reverse the decline.”