What Trump could do to the Federal Reserve
His inner circle contains some radical monetary thinkers—and Wall Street bankers. Who will prevail?
03/15/17 05:26 AM EDT
Source: Politico | by DANNY VINIK
What happens when President Donald Trump gets his hands on the Fed?
It’s the question gripping the economic world these days. Though not as big a headline as immigration policy or his cabinet picks, Trump has a chance to appoint a new person to nearly every top Fed job over the next two years—a power not afforded most presidents, and with very high stakes. The Fed’s decisions can ripple through the economy, making mortgages more expensive, causing mining companies to reduce investment in new machinery and preventing retail stores from hiring new workers.
Given the president’s tendency to take advice from a very close circle, experts have started casting a wary eye on just who’s in Trump’s immediate orbit—and what they think about the Federal Reserve. What they’re seeing suggests that Trump has the potential to bring more dramatic changes to the Fed than any president since at least Ronald Reagan.
While recent presidents have drawn from bankers and economists with a narrow set of views, Trump has surrounded himself with a number of advisors who hold extreme, even fringe ideas about monetary policy—including at least six who have spoken favorably about the gold standard. Not all are gold standard supporters, but many are far more hawkish in their approach to money than typical Fed officials over the past few decades.
The support for the gold standard around the president "seems like nothing that’s happened since the Great Depression,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics who has worked at the Fed off-and-on for the past 30 years. “You have to go back to Herbert Hoover.”
The first big signal of Trump’s direction will come with his choices for three open Fed board spots. Two spots have been empty for nearly three years, while another will open up in April when Fed Governor Daniel Tarullo steps down. Wall Street is especially awaiting Tarullo’s replacement because he has overseen the implementation of the Fed’s regulatory responsibilities under Dodd-Frank.
That's just the beginning, though. Before even half his term is complete, Trump will be able to choose an entire new leadership of the central bank: the terms of the chair and vice chair of the Board, Janet Yellen and Stanley Fischer, are both up in the first half of 2018. He will also influence the replacement for the president of the New York Fed, William Dudley, who is supposed to retire in January, 2019. Yellen, Fischer and Dudley currently hold the three most important positions at the Fed—known together as the Troika.
So, what will Fed policy look like under the Trump administration? As on so many other issues, Trump’s own views are nearly impossible to determine. At one point during the presidential campaign, Trump called himself a “low-rate person”; at another, he attacked the Fed’s low-rate policy for creating a “false economy.” But based on the figures around him, it’s possible to game out a few ideas for what monetary policy could look like in the years ahead. To do so, POLITICO spoke with former Fed staffers, economists and Trump advisors to understand what Trump might look for in nominees for top Fed positions and how those nominees, in turn, could alter the most important economic institution in the world. Here are four possibilities:
1. The gold standard returns.
The gold standard is nearly synonymous with “fringe idea” in modern monetary policy—not since 1933 has the United States literally pledged that it would back every dollar with a dollar’s worth of stored gold. But right now it’s high times for gold standard advocates, starting at the top of the executive branch: “Bringing back the gold standard would be very hard to do, but, boy, would it be wonderful. We'd have a standard on which to base our money,” Trump said in November, 2015.
Given Trump’s other comments on monetary policy, it’s impossible to say whether he actually supports the gold standard. But if he does, he would become the first president to favor it since Hoover, according to Louis Johnston, an economist at the College of Saint Benedict—a fact that’s not lost on its other fans in American politics. “We’re in a better position than we’ve ever been in my lifetime as far as talking about serious changes to the monetary system and talking about gold,” said former Rep. Ron Paul, a long-time supporter of the gold standard.
It’s not just Trump. Not since Reagan—perhaps earlier—have so many gold bugs had such high levels of influence in the White House. Beyond the president, the gold standard has support from Judy Shelton, the director of the Sound Money Project at the Atlas Network, who was on Trump’s transition team; Rebekah and Robert Mercer, top Trump donors who have funded past efforts in support of the gold standard; Ben Carson, the neurosurgeon turned presidential candidate who is now Trump’s Secretary of Housing and Urban Development; David Malpass, a former member of Trump’s transition team and potential selection for a top spot at Treasury; and John Allison, the former CEO of BB&T Corp. who Trump interviewed for treasury secretary in November.
Gold appeals to people who are skeptical of banks and global institutions and fear society’s collapse; it’s a durable commodity with tangible value that can be held in the hand. Like most “hard money” fans, gold standard supporters fear that the government’s looseness with issuing money will cause skyrocketing inflation and reduce the value of the dollar—unless they can put on the brakes by strictly tying dollars to a valuable, limited commodity.
"I would be in favor of a very future-oriented, neutral reference point that is universally accepted,” said Shelton, who also said she had not been in contact with the White House about an open Fed position. “It doesn’t have to be gold but I don’t know what would be better. What is universally recognized and historically acknowledged as a monetary surrogate that most central banks around the world hold? It could be oil. It could be sand.”
Starting in 1879, the U.S. tied the dollar to gold until it effectively abandoned the policy in 1933 after policymakers blamed it, in part, for the government’s weak response to the Great Depression. (Richard Nixon completely ended the dollar’s ties to gold in 1971, and today, no industrialized economy links its currency to gold.) Mainstream economists from both sides of the aisle oppose the gold standard for limiting the Fed’s ability to respond to recessions. In a 2012 survey of 32 economists by the University of Chicago, not a single one supported it.
Could Trump bring it back? Not likely. Even supporters of the gold standard admit that there are practical limitations to returning to such a standard today, including determining the price of gold given the government’s limited supply. But a Fed filled with gold standard supporters might weigh gold much more heavily in their monetary policy decisions—an indirect way, at least, for a gold-driven philosophy to influence the economy.
That would represent a dramatic break from the monetary policy debates in recent decades. Reviving the argument over gold would undoubtedly roil the economics profession, with unknowable effects on the broader economy. To most presidents, that may be a reason to avoid such a move. To Trump, it may be his exact reason for doing it. “He may not even support [the gold standard] but it’s a way of sticking the middle finger to the establishment,” said David Beckworth, a monetary economist at the Mercatus Center. “I could see a certain part of him being like ‘So gold standard is what irritates them, great, let’s run with it.’”
2. Ending the Fed’s dual mandate
Since 1978, the Fed has officially had two main directives: maximum employment and stable inflation. This is called the “dual mandate,” and sometimes the goals can be in conflict, as when unemployment falls so low that inflation rises. The art of running the Fed often consists in balancing the two successfully.
But Mick Mulvaney, president Trump’s new budget director, actually sponsored legislation to end the dual mandate when he was in Congress. Instead, Mulvaney, a fiscal hawk, wants to see the Fed focus solely on keeping inflation low. (Mulvaney has also flirted with fringe monetary thinking. In 2013, he appeared to publicly support a theory, popular on the libertarian right, that U.S. inflation statistics are rigged, and the government is underestimating the true level of inflation.)
Mulvaney has a powerful ally in Vice President Mike Pence, who during his time in Congress also sponsored legislation to end the dual mandate. But since the dual mandate is a statutory responsibility, Trump can’t end it through nominations alone. That could only happen through an act of Congress and it’s unlikely Senate Democrats, and many Senate Republicans, would agree to such a radical change. But even if the dual mandate is unlikely to be formally repealed, Mulvaney and Pence’s roles in the White House ensure that Fed hawks will receive a full hearing in the Trump administration and potentially gain important positions at the Fed. That could portend a more inflation-phobic Fed in the years ahead, even with the dual mandate still firmly in place.
3. A rules-based approach to monetary policy.
The most likely reform for the central bank goes by the technical term “rules-based.” This means that instead of the Fed setting its benchmark interest rate on the judgment of its policy-making committee, it would do so according to a specific rule. The most famous proposed rule comes from Stanford economist John Taylor—it’s known as the Taylor Rule—and incorporates changes to inflation, growth and other economic indicators. If applied now, the Taylor Rule would call for the Fed to set its benchmark interest rate at around 2.5 percent—far above its current level of 0.5 percent. This would instantly raise interest rates on everything from mortgages to credit cards to corporate loans, and likely roil financial markets.
Republicans for years have been yearning for a rules-based Fed, arguing that during the Obama administration, the Fed’s policy of keeping its benchmark interest rate near zero and buying trillions of dollars in assets to further lower long-term rates hurt seniors, whose savings benefit from higher interest rates, devalued the dollar and set the stage for higher inflation. House Republicans passed legislation requiring the Fed to adopt a rule of some kind, although it didn’t specify the Taylor Rule. The Fed would have been allowed to deviate from the rule, but would have to explain to Congress why it did so.
Unlike the gold standard, a rules-based approach to monetary policy enjoys support from many mainstream economists, including those who have largely supported Obama-era monetary policy. It also has support in Trump’s inner circles, including many of those who support a gold standard. Often, a rules-based approach to monetary policy is seen as a less-extreme version of the “hard money” philosophy, one that would still likely lead to tighter monetary policy. Fans in the Trump orbit include Peter Navarro, the U.C.-Irvine economist Trump chose to head the newly-created National Trade Council; Tom Price, the head the Department of Health and Human Services; and Larry Kudlow, the famed supply-sider and informal Trump advisor.
“There’s maybe no perfect rule or indicator but if you keep your eye on your Taylor rule, if you keep your eye on commodity prices, including gold, if you keep your eye on the Treasury yield curve, that will tell you whether the Fed is too loose or too tight,” said Kudlow.
4. Business as usual.
One other possibility: Trump doesn’t remake the central bank after all.
Traditionally, the president’s selections for top Fed posts are guided by a few key policymakers—the heads of the Office of Management and Budget, National Economic Council and Council of Economic Advisors, and the treasury secretary, along with senior staff at the White House. Besides Mulvaney, at OMB, feelings in that group on the Fed are more traditional. Treasury Secretary Steven Mnuchin and NEC Director Gary Cohn have both spoken positively of recent Fed policy, as has Wilbur Ross, Trump’s choice as commerce secretary, and are likely to support more traditional GOP nominees. Kevin Hassett, Trump’s pick to head the CEA who was a researcher at the Fed earlier in his career, has expressed skepticism about some of the Fed’s decisions after the financial crisis but is considered an establishment figure.
What could that look like? Former Fed officials and mainstream economists hope that Trump will choose to replace Yellen with a traditional Republican economist like Kevin Warsh, a former Fed governor, or Glenn Hubbard, the former top economist to George W. Bush. John Taylor is also frequently rumored as a top candidate for the job.
Maybe he even keeps Janet Yellen.
NO ALERTS AT THIS TIME.
FOR MORE INFORMATION ABOUT THE RV/GCR VISIT:
Source: Dinar Chronicles How can there possibly be enough? Enough money, enough gold, enough coordination, enough political will... have...
Wednesday, March 15, 2017
What Trump could do to the Federal Reserve