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Turbulences ahead for the Fed with the new administration

 

The essential

 

Donald Trump will be sworn in as US President on 20 January. With the Republicans in Congress, he will try to set radical reforms, in particular about the Fed.

 

In 2017, the Fed will enter an area of turbulence. The nominations that Donald Trump will make will greatly change the balance of power within the FOMC. The debates will mainly be about the necessity and the relevance of a Taylor rule. Furthermore, FOMC members don’t know where they stand on the probability of fiscal stimulus measures. Last, we think that an acceleration of the fed funds normalization at this stage of the cycle would be counterproductive.

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January 2017

 

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Janvier 2017

 

The Article

L'Article

 

The FOMC composition in 2017

In normal times, there are 12 voters at FOMC meetings (the last time they were 12 voters was in July 2013):

  • 7 members in the Board of Governors
  • the NY Fed’s president has a permanent seat
  • 4 of the 11 Reserve Bank presidents, who serve one-year terms on a rotating basis.

Currently, there are only 5 members in the Board as the Senate blocked Obama’s appointments. Donald Trump will pick 2 Board members. There are also rumours of Daniel Tarullo’s retirement and in this case, Donald Trump would have to pick 3 Board members. Appointments will have to be confirmed by Senate.

The four voting Reserve Bank presidents in 2017 will be :

  • Charles Evans, Chicago. He voted in 2007, 2009, 2011, 2013 and 2015. He dissented twice (November and December 2011) as he wanted an easier monetary policy. He is going to be one of the most dovish voters in 2017. This being said, he declared on October 24th that he was in favor of the December 2016 hike and of 2 hikes in 2017 and 3 in 2018.
  • Patrick Harker, Philadelphia. He has never voted. He is an academic. He describes himself as a hawk. Several times in 2016, he declared that 2 or 3 hikes in 2016 would be necessary. He will definitely be one most of the most hawkish FOMC members.
  • Robert Kaplan, Dallas. He has never voted. He worked 23 years for Goldman Sachs and he describes himself as a specialist of financial markets. He often advocates patience when making monetary policy decisions. He is concerned by student debt and by demographic trends. He will probably vote in line with the Board.
  • Neel Kashkari, Minneapolis. He has never voted. He was the Republican candidate for the 2014 California gubernatorial elections. He had contributed to the design of the TARP in 2008. He is against the Dodd-Franck act as he says that it would ‘miss the next crisis’ and he wants big banks to vastly increase equity capital holdings (to 15% of assets). Interestingly, even if Kashkari is a Republican, he is not in favor of a mechanical rule of monetary policy.
AINOUZ Valentine , Credit Strategy
DRUT Bastien , Fixed Income and FX Strategy
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Turbulences ahead for the Fed with the new administration
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