Today the US dollar seems to have halted the decline it had endured for the past few days. Treasury yields struggled to find their equilibrium yesterday, ending the day mostly flat, and are a touch lower today ahead of the forthcoming Fed meeting minutes. We should be able to see a little more detail on the discussions around unwinding the balance sheet and perhaps some important insights into the Fed’s view on the recent low core inflation figures. In any case, enjoy the finer points from what could be Yellen’s penultimate “full” Fed meeting (November and January meetings omit Economic Projections and Chair press conference).
For in around 100 days we could have a new Fed chair and if Trump’s words from a fortnight ago (that he’ll “be making a decision over the next two or three weeks”) are anything to go by–it may only be a matter of days before we find out who it will be. Yellen remains a possibility, with Gary Cohn, Jerome Powell and Kevin Warsh being the alternatives. Powell (or Yellen obviously) would be the most consistent with the current Chair in terms of (1) dovish/hawkish, (2) discretion in setting interest rate policy (rather than rules-based), (3) opposed to massive deregulation and (4) expectations of structurally lower growth prospects for the long-term.
Cohn could be an acceptable alternative but his candidacy seems to be tied to the success of President Trump’s tax reforms–which predictably Trump is revising over the coming weeks after a cold reception from fellow Republicans. We don’t see how any adjustments would adequately allay the many Senators’, like Bob Corker, concerns who continue to refuse to support a tax bill that would increase the US deficit. Nevertheless, should Cohn inherit the chairmanship we expect he would differ somewhat from Yellen: being more dovish, advocating for significant deregulation and importantly seems to believe that long-run growth prospects may not be lower with the potential for policy lift.
Then there’s Warsh. Economic and Fed pundits like Paul Krugman and Tim Duy have been unabashed with their criticisms towards Fed Chair candidate Kevin Warsh: with Krugman stating, “He’s been wrong about everything” and Duy posting an expose on how “These aren’t the kind of people you want in charge of monetary policy.” Pretty much all his major views are contrary to Yellen’s: from being more hawkish and more rules-based on interest rate policy, backing significant deregulation and view that the Fed Balance sheet should return to pre-crisis levels. But the overriding concerns, as Duy outlines, are much broader than these differences. His respected Fed Watch commentary goes so far as to say, “a Fed with someone like Kevin Warsh at the helm would prove to be disastrous for Wall Street and Main Street alike when the next recession hits.” Under such a scenario Trump would certainly get some of the blame for messing with what seems to be working, whereas there would be no grounds for such accusation should he appoint Yellen or even Powell. But Trump probably couldn’t care less, and so we wait for the announcement of his wise deliberations.