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2017: another tricky year for the Fed

While the 115th legislature of the US Congress began on 3 January and Donald Trump will be sworn in as President on 20 January, there are still sharp questions about the new administration's economic policy, and, to put it mildly, FOMC members don't know where they stand: "Many [FOMC] participants noted that there was currently substantial uncertainty about the size, composition, and timing of prospective fiscal policy changes, but they also commented that a more expansionary fiscal policy might raise aggregate demand above sustainable levels, potentially necessitating somewhat tighter monetary policy than currently anticipated." The FOMC minutes also tell us that half the participants at the 14 December FOMC incorporated an assumption of more expansionary fiscal policy in their forecasts, the other half has not. As a reminder, Janet Yellen said in a press conference on 14 December that fiscal stimulus measures were not required for the US economy to return to full employment.

During the electoral campaign, Donald Trump was highly critical of the Fed's policy in recent years, specifically saying fed fund rates have not been raised fast enough. The media made a fuss over Yellen not being reappointed as chair of the FOMC (her term expires in February 2018). Trump will soon have to appoint two members to the Board of Governors – or even three, if Daniel Tarullo retires. This could substantially change the balance of power within the FOMC.

Beyond the uncertainty over economic policy, 2017 will also be marked by possi-ble structural changes for the Fed. The platform A Better Way, promoted by House of Representatives leader Paul Ryan, posits that the US economy would fare better if the Fed "were more predictable in conducting its monetary policy and more transparent in its decision-making process." A Better Way proposes asking the FOMC for more explanations of its monetary policy decisions and requiring the Chair of the Board of Governors to explain to Congress why its decisions about fed funds differ from a Reference Policy Rule, in other words a traditional Taylor rule. In addition, John Allison, who is one of the people Trump could appoint to the Board of Governors, is in favour of a traditional Taylor rule. Among the other names floated for an FOMC post is… John Taylor, the Taylor rule’s theorist.


Adopting a Taylor rule is highly controversial. Neel Kashkari, Chair of the Minneapolis Fed and a former Republican candidate for governor of California, is against adopting a Taylor rule, because the neutral rate has weakened so much in the last few years. In a note published this week, Kashkari declared that the implementation of a Taylor rule over the last years would have kept 2.5 million Americans out of work. Jerome Powell, a member of the Board of Governors, had already given a speech on 9 February 2015 denouncing the possible adoption of a Taylor rule, saying that such a rule was already used for informational purposes but that he doubted that "important decisions [could] be reduced to a single equation."
For FOMC members, 2017 will decidedly not be easier than previous years.





DRUT Bastien , Fixed Income and FX Strategy
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2017: another tricky year for the Fed
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