BY JOHN MAULDIN
The current Federal Open Market Committee (FOMC) may have some new voters by March. There are two vacant seats Trump can fill as soon as he takes office and gets the Senate to confirm them.
However, there could be four or five more in the next two years.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Several Fed governors are going nowhere
It appears Janet Yellen isn’t going anywhere. Asked about her own future at the news conference, she noted that the Senate had confirmed her to a four-year term as chair and that she plans to finish it on schedule, that is, on February 3, 2018. She specifically noted that Federal Reserve appointments aren’t tied to presidential elections.
She also left open the possibility of staying on the Board of Governors even after her term as chair is over. Those are separate appointments. She can stay on the board until January 31, 2024. At age 70 now, I doubt she will, but it’s possible. We know Supreme Court justices delay retirement so that a president they like can appoint their successor. I think Yellen was reminding Trump that she has that option.
The same is true for Vice Chair Stanley Fischer. His board term lasts until January 31, 2020, so if he chooses to stay, it will be until either Trump’s second term or someone else’s first.
The other three serving Board of Governors members are Daniel Tarullo, whose term does not end until January 31, 2022; Jerome Powell, whose term isn’t over until January 31, 2028; and Lael Brainard, whose term ends on January 31, 2026. They can all elect to stay.
Can Trump shake things up?
You all know that I think the Fed needs a major shake-up. I think Trump can do it, too, but only to the extent there are vacancies he can fill. There are the two current openings, but beyond them, he will need some of the current five governors on the FOMC to step down voluntarily. The others’ terms all extend through 2022 or later.
If Yellen and Fischer decided they wanted to stay and the other three current board members also agreed to stay on, together—with the generally dovish district Federal Reserve presidents—they could seriously hamstring any real shift in Federal Reserve policy that Trump might prefer.
Fortunately for Trump, it’s pretty rare for Fed governors to complete their full 14-year terms. First of all, you have to realize that they get something like $169,000 a year. That’s a rounding error in their speaking income, not to mention what they can get by sitting on major corporate boards and consulting. And seriously, you have to be a total data wonk to get any excitement out of some of the responsibilities they have.
So consequently, they either retire or seek other opportunities. So, there’s a good chance Trump appointees will hold at least four of the seven Board of Governors seats by the end of his first term. That could happen as soon as mid-2018 if Yellen and Fischer retire when their leadership positions end.
And the winner is…
Okay, let’s ratchet up the drama. Lael Brainard was hoping to be appointed Secretary of the Treasury under a Clinton administration. Clearly, that’s not going to happen. She’s young enough that a future Democratic president could appoint her to the position, but does she want to hang around on the Federal Reserve for a minimum of four more years? I am told she doesn’t.
By people who know Governor Tarullo (and like him), I am told that he is likely to leave sooner rather than later. Currently, he is head of the Federal Financial Institutions Examination Council, a spot he is certainly qualified for but one that is generally given to the Federal Reserve vice chair. He is 64 years old, and I don’t think he will want to hang around just holding down a spot.
Jerome Powell’s background is impressive, but I wonder if he would want to be the last man standing of the current governors. I have heard nothing either way, and no one seems to really know—other than Governor Powell. He is actually the lone Republican on the board but has not proven as hawkish as some people thought he would.
Also for the record, I know that both John Taylor and Kevin Warsh would like to be Fed chairman. Either one would be a good chairman, but my true preference would be Richard Fisher, the former Dallas Federal Reserve president. The coming times are going to be extremely difficult to navigate by the limited means of monetary policy, but within that scope, the wisdom and counsel of Richard Fisher would be a great addition.
There are any number of good governor nominees, but let me put the names of Dr. Lacy Hunt and David Malpass on the list. Especially Lacy. True aficionados of the genre know that these two are not always on the same page, but they both bring an enormous amount of historical knowledge and economic sagacity.
So, it’s possible that Trump gets at least six and maybe seven appointments within his first two years to the Board of Governors of the Federal Reserve.