US: The Fed leadership shakeup – Deutsche Bank

According to the analysts at Deutsche Bank, US President Trump will have considerable scope to reshape the Fed in the coming months.

Key Quotes

“By April, there will be at least three vacancies on the seven-seat Board of Governors for Trump to fill. This potential for a dramatic Fed shakeup has started to come into focus for markets.”

“At this point there is substantial uncertainty about who could replace Chair Yellen. There has been little indication from the Trump administration about possible candidates, and the range of outcomes seems wider than in the past, given that Trump's economic team is composed of individuals that were previously relatively unknown in policy circles and who have not been associated with past administrations.”

“Based on Trump's past comments, the makeup of his economic advisors and appointments, and the political leanings of Congressional Republicans, it would seem that he may prefer a candidate that: (1) has significant experience in markets and/or business (i.e., a market practitioner rather than an academic economist), (2) does not have strong hawkish leanings that would work against Trump's growth agenda, and (3) does not forcefully reject greater Congressional oversight of the Fed.”

“Who occupies the Chair's seat would be critical for markets in any environment. But Yellen's replacement could be even more important, as he or she may well preside over an economy that is near full employment and that is given a large dose of fiscal stimulus. This raises the risk that the Fed could fall behind the curve.”

“There is the potential for more contention on the Committee going forward. The FOMC has become more centrist in recent years, with the number of dissenting votes, especially among Fed Governors, unusually low. These numbers were much higher during the 1970s and 80s, when Fed leadership appointed by one Administration faced dissenting votes by new governors appointed under the next Administration. Looking ahead, less consensus and more dissents would seem likely if there is a shift away from the center at the top of the Fed leadership, especially if some of the centrists now in office remain until their terms run out.”