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What could a President Trump mean for the FOMC?

THE ESSENTIAL

The theme of the relationship between the Fed and politics became unusually important this year, given the content of Donald Trump’s statements about the Fed and his gains in the polls in recent weeks.

As such, many questions have arisen about the future of the Fed in the event of a Trump administration. One question in particular is becoming more relevant and recurrent: if Donald Trump wins the presidential elections, could he dismiss Janet Yellen? In our assessment, dismissing Janet Yellen seems to be too complicated and, thus, very unlikely. Changes in the FOMC’s composition will depend crucially on the results of the Senate elections: in the event of a “Trump president/ Republican senate” administration, the “hawk” camp would gain weight, but not enough to really shift the view within the FOMC. In the case of a Hillary Clinton victory, the FOMC will remain permanently dovish.

 

 

 

PUBLICATION

 

 

 

2016-10-quote-01

The press conference with Fed Chairman Janet Yellen that took place after the September monetary policy decision was marked by regular questions on the U.S. economic assessment, but at this time an unusual topic popped-up: politics. As Janet Yellen clearly stated “we do not discuss politics in our meetings and we do not take politics into account in our decisions.” and “I can emphatically say that partisan politics plays no role in our decisions”. That said, even though the Fed has always been careful enough to continuously state its independence, the influence of politics on monetary policy decisions is a recurrent issue that is particularly apt to resurface in election years. However, at this time, the topic has become increasingly important for the US: the presidential election is taking place on 8 November and recent polls have showed that the “Trump President” scenario is starting to look very likely. Given Mr. Trump’s “controversial” statements on the Fed (see quotes above), there is a lot of uncertainty about the future of the Fed under a Trump administration, especially in terms of replacing the current Chairman Janet Yellen. Would it be possible for Mr. Trump to dismiss Janet Yellen?

In order to answer this question, it is important to understand how the board members of the Fed are appointed. Section 10 of the Federal Reserve Act states that the Board of Governors is made up of seven members, appointed by the President and confirmed by the Senate1. From among the members, the President also names the Chairman and the Vice-Chairman, for a term of four years. The Chairman and Vice-Chairman can be reappointed, an action that must also be confirmed by the Senate. Each member of the Board shall hold the office for a term of fourteen years, “unless sooner removed for cause by the President”. While this last sentence implies that the President can actually dismiss any of the Board members, this is only possible under a very specific condition: under the law, ending a contract “for cause” is intended to  address only those serious acts or omissions committed by an employee that adversely affect the company's business in a material respect. This implies that the President’s power is somewhat restricted. Thus, Donald Trump would have to first prove that Yellen was guilty of misconduct of some kind, which is clearly very different from disagreeing with her policy views. 

Even if Donald Trump were able to find some support to dismiss Janet Yellen “for cause”, the outcome would be far from clear as 1) Yellen could go to the Supreme Court against the President’s decision, with a good chance of winning following the precedent set in the Humphrey’s Executor versus U.S. 1935 case2. Moreover, 2) even if Donald Trump did fire Janet Yellen and appoint someone else to the Board of Governors and as Chairman, he would need two approvals from the Senate, which he would have no assurance of obtaining, and which could take months to complete; and 3) in the absence of the Chairman, the Federal Reserve Act states that the Vice-Chairman of the Fed would assume the leading role. This means that Stanley Fischer, who is known for taking the same policy view as Janet Yellen, would assume the Fed’s chair, thereby implying no major changes. Hence, replacing Janet Yellen seems far too complicated and, as such, her dismissal seems very unlikely. He would probably just not reappoint her as Chairman at the end of her term (February 2018) but she would remain Governor until 2024. 

The outcome of the Senate elections would be decisive for the FOMC. Currently, the Board of Governors has only five of its seven serving members. The terms of two members have expired and President Obama appointed two people to the Board in 2015: Allan Landon (former Bank of Hawaii CEO) and Kathryn Dominguez (economics professor at University of Michigan). Nevertheless, the Senate has not confirmed these names yet, as 1) it is currently controlled by the Republicans and has been since the 2014 elections; and 2) it seems to be awaiting the outcome of the next presidential election as, in this case, the next president is the one who will appoint the two new governors. If the Senate has the same colour as the next president, these appointments and confirmations might take place quite quickly. It is very important to bear in mind that many times over recent years, Republican Congressmen have complained about the Fed, saying that it kept interest rates too low for too long, and stating that they wanted the Fed to be far more hawkish. 

Thus, if Trump is elected and if the Senate remains Republican, Trump may appoint two hawkish Governors. This becomes very interesting when you do the maths, as the FOMC voters would be:

  • the five (dovish) Governors + Dudley (the NY Fed’s President)
  • the two (assumed hawkish) new Governors
  • the four voting Reserve Bank Presidents (who serve one year terms on a rotating basis).

Recently, the Reserve Bank Presidents have become more hawkish (three hawkish dissents in September). Thus, under the assumption of “Trump President / Republican Senate”, the power balance among the Fed would shift significantly. Even if the hawkish camp grows, that would (normally) not be enough for it to have the voting majority. However, as we saw few weeks ago with Minouche resigning as Deputy Governor of the BoE, central bankers resign sometimes… 

When do the Governors’ mandates end?

- Janet Yellen: her term as FOMC Chairman ends on 3 February 2018. Her term as Governor ends on 31 January 2024.
- Stanley Fischer: his term as FOMC Vice-Chairman ends on 12 June 2018. His term as Governor ends on 31 January 2020.
- Daniel Tarullo: his term as Governor ends on 31 January 2022.
- Jerome Powell: his term as Governor ends on 31 January 2028.
- Lael Brainard: her term as Governor ends on 31 January 2026.

2016-10-04-tab1-what-will-be-impact

__________

1 See Federal Reserve Act, Section 10: https://www.federalreserve.gov/aboutthefed/ section%2010.htm
2 President Roosevelt fired Mr. William Humphrey, a member of the Federal Trade Commission, because of political divergences. The case was brought before the Supreme Court which sided with Mr. Humphrey, effectively saying that political divergences did not apply as a cause.

Each member of the (Fed)
Board shall hold the office
for a term of fourteen years,
“unless sooner removed
for cause by the president”

 

 

 

 

 

2016-10-04-1

 

 

 

 

 

 

Replacing Janet Yellen
seems too much complicated
and, as such, her dismissal
seems very unlikely

 

 

 

 

 

 

 

The outcome of the Senate
elections would be decisive
for the FOMC

 

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DRUT Bastien , Strategy and Economic Research at Amundi
FORTES Roberta , Strategy & Economic Research
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