Tag Archive for FOMC

Personnel Is Policy: Who Donald Trump Could Appoint To The Fed

There is perhaps no better way of summing up the direction of any organization than the phrase: “Personnel is policy.” With regard to government, that means that the people who are put into positions of power indicate the direction of actual policy more clearly than the President’s statements. President Ronald Reagan’s tenure was a good example of this. Despite his many public statements in favor of gold, his appointments to key positions and in particular to the Gold Commission were people who undermined his publicly-stated positions. Whether he was aware of this or not is up for debate, especially as we now know of his battle with Alzheimer’s.

That is the danger that might face the current Trump Administration where, despite his many public statements favorable to the gold standard, President Trump may end up appointing officials who hold exactly the opposite view as he does. This is particularly important now that news outlets have been reporting this week that President Trump is set to appoint Randal Quarles to the Federal Reserve Board as Vice Chairman of Regulation. Mr. Quarles’ biography is as establishment as it comes. He received his A.B. from Columbia University and his J.D. from Yale Law School. He worked at the Carlyle Group, a leading private equity firm whose close political connections to former senior Administration officials are legendary. His wife is Hope Eccles, grand-niece of Marriner Eccles, the Federal Reserve Board’s Chairman from 1934-1948, after whom the Fed’s headquarters building is named. Mr. Quarles also served as Under Secretary of the US Treasury, Assistant Secretary of the Treasury for International Affairs, US Executive Director of the IMF, US Executive Director of the European Bank for Reconstruction and Development, etc. Doesn’t exactly sound like a guy who is about to shake things up, right?

While his nomination isn’t official yet, let’s look at some other possible candidates President Trump might appoint to the Federal Reserve’s Board of Governors. We’ve split them into four categories.

1. The Dream Team – those candidates who would be the best possible from the perspective of those of us favoring sound monetary policy.

2. Establishment Favorites – the favorite candidates of the Establishment, or those already under consideration by the Administration.

3. The Compromise Candidates – these candidates are all former Presidents of regional Federal Reserve Banks. While they wouldn’t be the first choices of either the Establishment or of advocates of sound monetary policy, sending former regional Fed Presidents to serve on the Board might send a message to the Board to take into account not just the views of the Washington/New York financial-political elites.

4. The Dark Horses – while perfectly qualified for serving on the Board, these candidates are probably not as well known to the general public, and even to most policymakers, as some of the others.

Remember, President Trump will have at least four appointments to make in his first term, maybe even five if Chairman Yellen resigns her seat after her chairmanship is up, so his decisions on appointments could have a strong impact on the conduct of monetary policy going forward.

Donald Trump and the Federal Reserve’s Board of Governors

With the announcement earlier this week that Federal Reserve Board of Governors member Daniel Tarullo will resign effective April 5, 2017, the Federal Open Market Committee (FOMC) will likely find itself in a highly unusual situation come April, one in which the regional Federal Reserve Bank Presidents on the FOMC outnumber the members of the Board of Governors. The Board of Governors of the Federal Reserve System has been operating with two vacancies for several years, following the resignations of Jeremy Stein and Sarah Bloom Raskin in 2014, and Tarullo’s resignation will bring that to three open positions.

Let’s recall the structure of the Fed’s Board of Governors. Each of the seven governors is appointed to a 14-year term, with each term beginning on February 1st in an even-numbered year every two years and expiring 14 years later on January 31st. So a new term began on February 1, 2016, another will begin on February 1, 2018, another on February 1, 2020, etc. The two current open terms are the one that began in 2016 and the one that will begin in 2018. Tarullo’s term expires January 31, 2022. A governor appointed to a full term may not be reappointed, but a governor appointed to fill the remainder of an unexpired term may be reappointed for another full term.

The two current openings mean that President Trump could appoint someone to the current unexpired term that expires January 31, 2018, then reappoint that person to a full term that expires January 31, 2032. He could also appoint someone to the unexpired term that began February 1, 2016 that expires January 31, 2030, and that person could then be reappointed in 2030 until 2044. With Tarullo’s resignation, he could appoint someone to fill that unexpired term and, if he wins re-election in 2020, reappoint that person to serve until 2036. Finally, Vice Chairman Stanley Fischer’s term expires January 31, 2020, giving President Trump a fourth appointment opportunity until 2034. And, since Chairman Janet Yellen’s term as chairman expires in 2018 (her Board position expires in 2024), President Trump will also get to pick a new chairman next year.

The Bullard Flip Flop Continues

Coming in at the end of Friday, we have a little flashback to our article about St. Louis Fed President James Bullard and his penchant for constantly changing his views on the proper course for monetary policy. At the time we published the article, Bullard was in his hawkish phase, but he subsequently went back to being a dove, stated that the US economy only needed one rate hike through 2018. Now he is back to aligning himself with the hawks, stating that another rate hike next year would be appropriate, as would beginning to allow the Fed’s balance sheet to shrink. Perhaps that is why the FOMC can’t seem to make up its mind on what it wants to do, its members keep changing their opinions on what’s happening and what they should (or shouldn’t) do about it. As we wrote back in March:

At the end of the day, decisions on monetary policy are ultimately a judgement call, made with the same level of thought that might be given to where to hold the office Christmas party. The value of the dollar, the standard of living of the American people, and the health and well-being of money and banking in the United States are placed in the hands of a tiny group of people. It is a recipe for failure and disaster. Far better to leave everything to the workings of the market, where the choices of millions work together for mutual betterment and to outweigh the efforts of would-be tyrants, than to trust in the capricious and flighty fancies of our modern-day mandarins.

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Takeaways From The FOMC Meeting

As expected, the Federal Open Market Committee (FOMC) raised its target federal funds rate to 0.50-0.75%. There wasn’t much substantive change in the language of the statement. Economic activity was judged to be expanding at a moderate pace, with a declining unemployment rate. Measures of inflation were said to have “moved up considerably” but still remain low, which seems to be contradictory. All FOMC members voted in favor of raising the target federal funds rate at this meeting.

Looking forward to 2017, some media reports have touted that the Fed’s “dot plots” point to the potential for three rate hikes in 2017. That possibility has a few things working against it. First, the Fed is watching closely to see what other central banks are doing. If the European Central Bank, Bank of England, and Bank of Japan maintain loose monetary policy, the Fed will find it tough to raise rates unilaterally. Secondly, the FOMC membership is switching up again as it does every year. For those who are unfamiliar, here’s the Federal Reserve’s description of the FOMC:

The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options.

Next year the four Federal Reserve Bank Presidents rotating onto the FOMC are: Charles Evans of Chicago, who has a dovish reputation; and Patrick Harker of Philadelphia, Robert Kaplan of Dallas, and Neel Kashkari of Minneapolis, all of whom are recently-hired and will be voting on the FOMC for the first time. Dallas and Philadelphia have reputations for being more hawkish, but it remains to be seen whether the new Presidents will maintain that reputation.

What the Federal Reserve Will Do This Week

Just about everyone expects the Federal Open Market Committee (FOMC) to raise its target interest rate at its meeting this week. The talk of raising rates has occupied newspaper columns all year, and the comments from FOMC participants have become stronger in recent months in discussing their desire to raise rates. But the decision to raise rates won’t have come about because of any strong economic data, be it inflation hovering around the Fed’s target or the low unemployment rate showing strength in the labor market. Labor market activity has been relatively steady all year and there haven’t been any surprisingly strong signs of economic growth, so why the green light now? Because the European Central Bank (ECB) announced at its meeting last week that it would extend but taper its bond purchases.

In the aftermath of the financial crisis, one central bank after another engaged in quantitative easing. The Federal Reserve, Bank of England, ECB, and Bank of Japan all engaged in large-scale asset purchases in attempts to drive down interest rates, remove overvalued assets from bank balance sheets, and attempt to jump-start their economies. Various interest rate targets were driven to near-zero, and even negative in Japan and Europe. Central bankers eventually realized that they couldn’t maintain those levels of policy accommodation indefinitely. But no one wanted to be the first one to start tightening. The fear was that if a central bank began to tighten policy while other central banks didn’t, the first country’s tighter policies would cause its economy to slow down, harming its relative position vis-a-vis other major countries. No central bank wanted to take the blame for weakening its country’s economy. So month after month, meeting after meeting, central banks just held pat.

Fed Holds Rates Steady: Setting Up for December Hike?

In an unsurprising decision, the Federal Open Market Committee (FOMC) decided today once again to keep its target federal funds rate steady at 0.25-0.50%. It was widely speculated that the FOMC would hold rates steady at today’s meeting due to concerns about influencing next week’s Presidential election. Expectations now are that the Fed, if it decides to raise rates, will do so at next month’s FOMC meeting.

There were no significant changes in the language of the statement from September’s meeting. Household spending was described as “rising moderately” rather than growing strongly, price inflation and measures of inflation expectations have risen but still remain lower than what the Fed would like to see, and the case for raising rates has continued to strengthen. Voting against today’s action were Esther George from Kansas City and Loretta Mester from Cleveland, both of whom wanted to raise the target federal funds rate to 0.50-0.75%. Eric Rosengren, who voted against September’s FOMC action, switched this month to supporting the most recent FOMC action.

It remains to be seen when the Fed might raise rates, as it seems that central banks are waiting to see what the other central banks are going to do before they make their own decision. The Fed, the Bank of Japan, the European Central Bank, and others are playing a game of chicken. They are like cars heading full-speed towards a volcanic crater, soon to plunge into the chasm and assured of destruction. Yet none of them want to be the first to hike rates. That would be tantamount to admitting error, or at least admitting defeat, and would be a tremendous blow to their pride. And so meeting after meeting we see central bank after central bank holding steady.

Some of them like to talk a good game, jawboning markets into thinking that more easing might be on the way (BOJ, ECB) or that rate hikes are just around the corner (Federal Reserve), but they never back up their tough talk with action. Watching central banks nowadays is like watching a game of poker in which each player has a horrible hand, tries to bluff, and is unwilling to show his hand. And so it goes again today. Even if the Fed were to raise rates next month, it would likely only be to 0.50-0.75%, still an abnormally low figure. Given that the Fed spent all year talking about raising rates and not doing anything, it would be safe to say that rates won’t even approach 1% until December of 2017. Don’t expect full “normalization” to be reached until 2020 at the earliest, assuming the economy doesn’t go down the toilet before then, which is very likely given the huge asset bubbles that easy money policies have inflated all across the world.

FOMC, Not Surprisingly, Holds on Interest Rates Again

The Federal Open Market Committee (FOMC) decided yet again today to hold off on raising the target federal funds rate. Not much changed in the language of the FOMC statement, with the Fed believing that the labor market continues to strengthen and that economic activity is picking up. The FOMC continues to see economic activity expanding, the labor market strengthening, and thus a stronger case for an increase in the federal funds rate. Perhaps the only shocking part of today’s FOMC statement was that there were three dissensions from the decision. Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester, and Boston Fed President Eric Rosengren all dissented, each favoring a rise in the federal funds rate to 1/2 to 3/4 percent.

While there had been some discussion of a surprise rate rise today, and the dissent of three FOMC members shows indications that a rate rise may very well be around the corner, news of today’s Bank of Japan monetary policy action may have also played a role in the Fed’s decision not to raise rates today. Tightening monetary policy, no matter how loose it still remains, while other central banks continue to loosen, will only exacerbate the effects of the Fed’s actions. Perhaps the Fed is just taking a wait and see approach to see what happens in Japan and Europe before it decides to go ahead with another rate hike. Let’s hope that someone asks that question in this afternoon’s press conference.

Federal Reserve Holds Yet Again

Unsurprisingly, the Federal Open Market Committee (FOMC) decided today once again to hold the target federal funds rate at 1/4 to 1/2 percent. Kansas City Fed President Esther George was the sole dissenting vote in this month’s FOMC statement, preferring that the target federal funds rate be raised to 1/2 to 3/4 percent. Pointing to some of the rosier economic data that has come out recently, the FOMC adopted a slightly more upbeat stance in its statement. According to the FOMC, the labor market has strengthened, labor utilization has increased, and household spending has been growing strongly.

One curious statement added in this month’s statement is that “Near-term risks to the economic outlook have diminished.” This is probably a reflection of a belief that market risks from China, from the Eurozone, or within the United States have largely blown over. This seems overly optimistic. While August will likely be slow with so many people taking vacation, September has a history of being an unruly month and the next two to three months are definitely within the “near-term.” Has the Fed forgotten the roller coaster that was September 2008? China is a powder keg waiting for a spark, the Eurozone is facing another crisis in the Italian banking system, and the United States has seen bouts of “good” economic data followed up the next month by bad economic data. Whether the economy will boom or bust over the next three months is still up in the air.

Given the Presidential election coming up in November, it would be highly unlikely for the Fed to raise the target federal funds rate until after the election. The Fed wants to make the economy look as good as possible before the election, and raising rates risks slowing things down and increasing pessimism among voters. That would play into Donald Trump’s hand, so we would not be surprised if President Obama has told Chairman Yellen to do whatever she can to ensure a rosy outlook in November.

Fed Declines to Raise Rates

The Federal Open Market Committee (FOMC) decided today to leave the target federal funds rate at between 0.25 and 0.50 percent. This was widely expected, given the dismal jobs report that was published two weeks ago and the uncertainty in the banking sector surrounding the UK’s upcoming Brexit vote. Some FOMC participants had in recent weeks expressed uncertainty about raising rates because of the potential for instability in the banking sector if the UK votes to leave the European Union.

Language in this month’s FOMC statement was largely unchanged from April. The main changes in emphasis were that the FOMC appears to be more downbeat about job gains, stating that the “pace of improvement in the labor market has slowed”, although the Committee continues to believe that “labor market indicators will strengthen.” Additionally, the Committee claimed that household spending has strengthened, but it flagged business fixed investment as soft. References to strong job gains from the April statement were removed in the June statement. The FOMC still maintains that inflation is running below its 2 percent target and points to most measures of inflation expectations remaining little changed. Perhaps surprisingly, there was no mention of specific international factors such as Brexit that might factor into decision-making, only the same “the Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Today’s decision was passed unanimously. Kansas City Fed President Esther George, who dissented from the previous statement and favored a rate hike in April, voted in support of this month’s FOMC policy decision.

Since markets were largely expecting rates to remain steady, we expect no major ramifications from this announcement. More interesting to markets will be the Bank of England’s monetary policy announcement tomorrow, coming one week before the Brexit vote. The ECB has already vowed to support the banking sector in the event that the UK leaves the EU, so it will be interesting to see if the Bank of England makes the same promise to UK banks.

Finally, Fed Chairman Janet Yellen testifies before the Senate and the House of Representatives next week as part of her semiannual Humphrey-Hawkins testimony. Summer testimony has normally been held in July, so these earlier testimony dates are undoubtedly an attempt to provide more timely scrutiny of today’s FOMC decision.