Janet Yellen’s term as head of America’s central bank, the Federal Reserve, expires in early February. It’s not clear if she will stay on or be dispatched to retirement. But would a change in the top seat really make any difference to US monetary policy and share trading?
First, if you’re the boss of the world’s biggest banking system it helps to have the President’s backing for day-to-day operations. Has Yellen got that backing? That’s not clear – at all.
Trump has made it known that Gary Cohn, his economic policy director, could be a candidate for the role. But only the President decides. And Trump, highly partisan in behaviour and outlook, is not known for his personal, unforced warmth towards the woman in the world’s top finance seat.
The personal is – very – political
Personal politics is everything to Trump. Yellen, on the other hand, claims there’s no space for any partisan mucking about at the Federal Reserve. At all.
“We are trying to decide,” she made clear in late September 2017, “what the best policy is to foster price stability and maximum employment and to manage the variety of risks…we do not discuss politics at meetings and we do not take politics into account in our decisions.”
Yellen’s position couldn’t be clearer: I do not do deals. A clear rebuff to the – claimed, at least – biggest dealer now occupying 1600 Pennsylvania Avenue.
Given that Trump has increasingly pushed aside people from the previous administration, Thorsten Beck, professor of banking & finance at the Cass Business School, doubts Yellen will be re-hired.
So if Yellen gets the push, what happens to Fed policy? “I doubt there will be many changes in monetary policy,” Beck told Capital. “She has been considered a ‘dove’, with a very cautious approach to tightening. Given Trump’s focus on growth, any replacement would be leaned on to continue with rather easy monetary policy."
He goes on: “Where there will be potentially a much bigger change will be regulation of the financial system, where new appointees to the Fed might take a much more lenient approach towards risk-taking by banks. It won’t be so much a rewriting of Dodd-Frank (which is unlikely) to happen, but the application of existing regulatory rules that will change.”
Post-crisis repairs hated
All financial meltdowns see a trail of far-too-late legislation in their wake, built to repair or repel the risk of a similar event in future. America’s Great 1930’s Depression saw the Glass-Steagall Act 1933, designed to rein in over-enthusiastic commercial lending (sounds familiar?).
And the Dodd-Frank Act of 2010, bolted to the statute books by ex-President Barack Obama, followed the 2007-2008 financial crisis. It was constructed to stamp out the possibility of too-big-to-fail banks and other massive commercial operations that encouraged high-risk lending. High risk lending bought on the creation of new credit instruments that led to the credit crisis.
Lots of good intentions. But risk and credit go to the heart of what Trump is about, at least in his commercial life. He hates the Dodd-Frank Act. He wants to do a “big number” on it.
“We expect to be cutting a lot out of Dodd-Frank,” says Trump, “because frankly I have so many people, friends of mine, that have nice businesses and they can’t borrow money … They just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.”
Return to pre-crash?
To Yellen, that is toxic. “Already, for some,” she said at the annual meeting of central bankers in August in Wyoming, “memories of this experience [the financial crisis] may be fading – memories of just how costly the financial crisis was." She went on: “The core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth.”
Some of that resilience is supported by record – though ready to pop, some fear – US stock prices, job growth (much of the growth though is cranked out from low-wage service roles) and an economy that is picking up speed, despite bumps and jolts (hurricanes Irma and Harvey and the on-going Trump–Kim Jong Un game of chicken).
Yet much of the Trump message is about growth, and more growth; he has promised +3% GDP growth a year. Yellen is more cautious. On her watch inflation stability – not too much but enough to lift wages for as many as possible without denting corporate profits – plus job growth is the priority. That’s a broader remit with a big-ish dollop of social responsibility beaten into the mixture.
“The pre-crisis Fed was of the belief that the unemployment rate served as an excellent proxy for labour market activity,” Rob Martin, US economist at UBS and an ex member of the staff Fed Board, told Bloomberg in September. “She is the one that said: just because the unemployment rate is falling doesn’t mean there still aren’t a lot of people who were pushed outside of the labour market’”.
A very different set of values.
Second term lack of interest?
Yellen herself has steered clear of saying whether she even wants a second term. Amazingly – though the shock power gets ever lower – The Donald may have not even thought twice about whether Yellen stays, or empties her desk.
"I'm not sure he has any coherent thoughts on the matter," Andrew Rose, an economics professor at Berkeley, told CNN recently. "Even if he had any coherent thoughts on the matter, he might change them in the next 45 minutes."
Either way, a change at the Fed looks unlikely to recast monetary policy or make life trickier for traders. Trump wants a de-regulated business environment propped up by low interest rates.
But low interest rates can limit the growth potential of any economy. In fact, low interest rates are because of a weak economy said Stanley Fischer, Yellen’s vice-chair, in an outbreak of bluntness recently.
On Fischer’s reading a second Yellen term is the prescription the US needs but may not get. Yellen is thought to want to raise rates in December and has pencilled in three rises for 2018.
Short term, then, traders can probably relax.