FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 28, 2017

  1. Trump Criticized Federal Reserve Chair Janet Yellen on the Campaign Trail
  2. How the Fed Board of Governors Controls Monetary Policy
  3. How Trump Could Appoint Five Members of the Fed Board
  4. Implications of Trump’s Upcoming Remake of the Fed Board
  5. Alpha Advantage Webinar This Thursday at 3:00 PM CST

Overview

The mainstream media is intently focused on the fate of President Trump’s Supreme Court nominee Neil Gorsuch. Judge Gorsuch is imminently qualified to serve on the Supreme Court and, if confirmed, he would fill the seat of the late conservative Justice Antonin Scalia.

Daniel Tarullo Federal Reserve
skeeze / Pixabay

Yet the Democrats seem prepared to fight tooth and nail to block Judge Gorsuch’s confirmation at every turn, including a possible filibuster of his nomination. This seems odd given that Gorsuch would be replacing a conservative Justice, and the fact that he was unanimously approved by both Republicans and Democrats for his current position on the 10th Circuit of Appeals. So what don’t the Dems like now?

You would think the Democrats would save their opposition firepower for President Trump’s next Supreme Court nomination, which will almost certainly be to replace one of the aging liberal members of the High Court.

I could devote today’s E-Letter to a discussion of Judge Gorsuch’s Supreme Court nomination, but I suspect most of my readers are already following this topic to some extent. Instead, I’ll focus on an important topic which is getting almost no coverage in the mainstream media – at least not yet.

President Trump has the opportunity to reshape the Federal Reserve in his first term more than any president in recent memory. Mr. Trump will likely have the opportunity to appoint five of the seven members of the Fed Board of Governors in his first term in office.

Why is this important? Because the Federal Reserve Board of Governors ultimately controls the nation’s monetary policy and the level of interest rates. After almost a decade of unprecedented near-zero interest rates, Trump’s upcoming Fed appointments could change all that fairly quickly.

It’s a very important issue, but it’s complicated. I’ll try to break it down for you today. It’s difficult to decide where to start, but I’ll do my best.

Trump Criticized Fed Chair Janet Yellen on the Campaign Trail

I think the best place to start this discussion is to point out that Donald Trump frequently criticized Federal Reserve Chair Janet Yellen during his presidential campaign for keeping interest rates too low for too long.

While Trump stopped short of vowing to replace Yellen if elected president, most Fed-watchers believe that is exactly what he plans to do early next year. Ms. Yellen’s term as Fed Chair ends on February 3 of next year, at which time Trump can extend her term or replace her.

As I will discuss below, President Trump will also have the opportunity to replace several other members of the Fed Board of Governors during his first term in office. To understand why this is so important, let me briefly explain how the Fed Board of Governors works.

How the Fed Board of Governors Controls Monetary Policy

The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board (FRB), is the main governing body of the Federal Reserve System. The FRB is charged with overseeing the 12 regional Federal Reserve Banks and with helping implement the monetary policy of the United States.

Fed Governors are appointed by the President of the United States and confirmed by the Senate for staggered 14-year terms. Normally, there are seven members of the FRB, but currently there are only five members. President Obama could not get any of his FRB nominees confirmed by Congress.

Given this, President Trump has the opportunity to immediately nominate two individuals to fill the open seats on the FRB. Plus, one of the current five members of the FRB has announced that he will resign in April, leaving three seats for Mr. Trump to fill. But I’m getting ahead of myself.

The Federal Reserve Board is charged with several important functions, including:

  • Decide the nation’s monetary policy to promote maximum employment, stable
    prices and moderate long-term interest rates in the US economy;
  • Promote the stability of the financial system and seek to minimize and contain systemic risks through active monitoring and engagement in the US and abroad;
  • Regulate the safety and soundness of individual financial institutions and monitor
    their impact on the financial system as a whole;
  • Foster payment and settlement system safety and efficiency through services to the banking industry and the US government that facilitate US-dollar transactions and payments; and
  • Promote consumer protection and community development through consumer-
    focused supervision and examination, research and analysis of emerging consumer issues and trends and the administration of consumer laws and regulations.

The current members of the Federal Reserve Board (remember there are currently only five) are: Chair Janet Yellen, Vice-Chair Stanley Fischer, Jerome Powell, Ms. Lael Brainard and Daniel Tarullo.

The seven-members of the Federal Reserve Board of Governors also serve as members of the Fed Open Market Committee (FOMC) which sets short-term interest rates. The FOMC normally includes the seven members of the FRB, four rotating Federal Reserve Bank presidents and the president of the Federal Reserve Bank of New York – for a total of 12 members.

How Trump Could Appoint Five Members of the FRB

This is a little complicated, but I think I can walk you through it. Remember that there are currently two vacancies on the normally seven-member Federal Reserve Board, so let’s start with them and then move on to the other members.

Two Vacancies: President Trump can immediately nominate two individuals to fill these two FRB slots. I don’t know why he hasn’t already.

Chair Janet Yellen: Her term as Fed Chair ends on February 3, 2018. It is widely expected that President Trump will replace her at that time. However, even though Yellen’s term as Fed Chair expires on February 3, she could stay on as a FRB Governor until January 2024 if she so chooses. This is where it gets complicated.

Remember, FRB Governors have 14-year terms. So Yellen could be replaced by Trump as Fed Chair but stay on as a Governor if she wants to. Most Fed-watchers do not believe Yellen will stay on at the Fed if Trump replaces her as Chair.

So to this point, we have three slots at the FRB for Trump to replace: the current two vacant seats and likely Janet Yellen.

Vice-Chair Stanley Fischer: His term as a FRB Governor does not expire until January 2020, so he could technically stay on as Vice-Chair, or as a Governor, even if Yellen is replaced. Yet Trump also has the authority to replace Fischer as Vice-Chair if he so chooses.

Most Fedwatchers believe that if Trump replaces Yellen, Fischer will resign as well. That, apparently, is the tradition. Plus, Mr. Fischer is 74 years old.

This brings us to four slots at the FRB for Trump to replace: the current two vacant seats, Janet Yellen and Stanley Fischer.

Governor Daniel Tarullo: He announced in February that he is resigning from the Federal Reserve Board of Governors in early April, nearly five years before his term expires in January

1, 2  - View Full Page