Trump And The Fed

President Trump could appoint up to six members to the Fed’s Board of Governors, which will affect the direction of U.S. monetary policy for several years.

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The Fed’s Board of Governors consists of seven members appointed for a fourteen year term. This includes a Chair and a Vice Chair, who serve separate four year terms in this capacity. The seven individuals on the Board of Governors, along with the president of the New York Fed, are permanent voting members of the FOMC. The remaining four votes are rotated annually among the other Fed districts. The key point is that with seven out of twelve votes, the Board of Governors has a disproportionate weight in setting U.S. monetary policy.

With Governor Tarullo announcing his resignation on Friday, there are now three vacancies on the Board of Governors. Janet Yellen’s term as Fed Chair expires in February 2018 and Stanley Fischer’s term as the Vice Chair will expire in June 2018. It is very likely that they will not be reappointed. In addition, it is quite possible that Governor Brainard, a Democrat and Clinton supporter, will also step down sometime in the next few years. All this means that President Trump may end up appointing five or six Fed governors.

It is certainly easy to envision Trump stacking the Board of Governors with doves. An accommodative Fed would help his agenda on two fronts. First, he is a self-proclaimed “king of debt” and his fiscal policies would blow out the deficit. The budgetary shortfalls could be financed at lower than otherwise interest rates. Second, a dovish Fed would push the dollar lower, providing support to manufacturing and exports.

The problem with this theory is that Trump’s public pronouncements on monetary policy have generally been on the hawkish side. He criticized Janet Yellen on the campaign trail, accusing her of trying to goose the economy in order to help the Democrats at the polls. Granted, Trump’s views on the hard money/easy money debate may have changed now that he is president and poised to benefit politically from a more stimulative monetary policy. Nevertheless, it could still be difficult for him to make a complete U-turn on the subject, especially since Senate Republicans are likely to resist efforts to pack the Fed with doves.

Is The ECB’s Policy Stance Counterproductive?

If the ECB’s ultra-looseness is an attempt to quell a flare-up of ever-present political risk, the strategy is becoming counterproductive.

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In addition to irking President Trump, the ECB’s extreme policy is riling Germany’s Finance Minister Wolfgang Schäuble, who has blamed Mario Draghi for “50 per cent” of the success of the populist right-wing Alternativ Für Deutschland. And by frustrating voters worried about the low interest rates on their hard-earned savings, the ECB is also playing right into the hands of Marine Le Pen’s Front Nationale.

The ECB acknowledges that “the risks surrounding the euro area growth outlook relate predominantly to global factors” rather than domestic factors. If the ECB is right, the extent of anticipated monetary tightening outside the euro area is overdone. If the ECB is wrong, then the extent of anticipated monetary tightening inside the euro area is underdone. Either way, the investment conclusion is the same. Our European strategists recommend an underweight position in German Bunds relative to U.S. Treasuries. Near-term risks to the euro are to the upside, especially versus sterling.