If President Donald Trump reappoints current Federal Reserve chair Janet Yellen to a new term in February 2018, no one will be able to say truthfully that he didn’t know exactly what kind of chair he would be getting. Not after her speech today at the Kansas City Fed’s gathering of central bankers in Jackson Hole, Wyoming.
And, I would argue, that Yellen’s speech, without ever putting a date to either the Fed’s next interest rate increase or to the beginning of a reduction in the size of the Fed’s balance sheet, provides remarkable clarity about the Fed’s schedule for those two events.
Yellen’s topic this morning was the stability of the global financial system after the financial crisis that almost turned into a re-run of the Great Depression. She argued that the financial regulations put in place after the crisis–including the regulatory framework of the Dodd-Frank regulations–had made the financial system safer. That’s not exactly the position of either Gary Cohn, the head of Trump’s National Economic Council (and former president of Goldman Sachs), or Steve Mnuchin, Trump’s Secretary of the Treasury. Both have said that they think these regulations have slowed the economy by hindering bank lending, and are in need of a sweeping overhaul that would include the repeal of major parts of Dodd-Frank.
Trump has said that he’s considering reappointing Yellen to a second term, but he’s also said that Cohn and two or three others would make good heads of the Fed.
During the election campaign, Trump repeatedly said that Dodd-Frank hurt the economy by discouraging banks from making loans to credit-worthy borrowers. Cohn has said, “We’re going to attack all aspects of Dodd-Frank.”
Today Yellen begged to differ:“The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth,” she said.
Yellen did say that the Fed was open to making changes in the way that small banks were regulated. But “any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years,” she said.
I’d certainly assume that Yellen knows exactly how out of step with the anti-regulatory thrust of the Trump administration her remarks were.
Which is what makes them so interesting for those of us trying to figure out what the central bank’s next policy steps might be.
If you’re standing in Yellen’s shoes now, and in the shoes of the majority of Fed governors who agree with this speech, you’ve got to be fully aware that the odds are that Trump will appoint someone more in line with his regulatory philosophy when Yellen’s term expires on February 3. To me that argues that Yellen and that Fed majority would want to do everything it can to lock the current Fed policy into place before a Yellen departure. That means, first, committing the Fed to reducing its balance sheet in 2017–and announcing that change at the September meeting of the Fed–and second, getting that next interest rate increase into history and locking the Fed into a return to “normal” interest rates before a potential February departure. That would argue for an interest rate increase in December.
At least that’s how I hear what Yellen’s speech said about monetary policy–even though she didn’t talk about that policy today.
