US Monetary Policy Faces Uncertain End Game with Looming Fed Personnel Changes
The number of vacant positions on the Fed’s Board of Governors has risen to four since President Trump took office due to the recent resignation of Fed Vice Chairman Fischer. Until the President fills these vacant slots, the balance of influence on the Federal Open Market Committee (FOMC) could temporarily shift to the regional Federal Reserve Bank Presidents.
Failure to restore the Board of Governors’ in-built majority on the FOMC implies that the current shortage of personnel could introduce transiency into US monetary policy conduct due to voting rotations amongst regional Federal Reserve Bank Presidents next year. Meanwhile, President Trump needs to quickly clarify the tenability of Fed Chair Yellen in her current position.
The Trump Administration is rumoured to have a long list of potential candidates to succeed Chair Yellen, including former Fed Governors and bank executives. President Trump demands loyalty, thereby implying that nepotism could dictate the outcome.
Fed Governor Brainard has made another attempt to justify slowing interest rate normalisation due to unhinged inflationary expectations with a downward bias. Unlike 2016, however, the economy appears to be performing relatively well, making her case more difficult to justify.
Financial markets are currently attaching a relatively low probability to a December increase in the federal funds rate, something which is at variance with the current views of important FOMC members. Above-trend growth justifies further tightening, albeit at a continued glacial pace.
The FOMC does not have the luxury of allowing financial conditions to continue easing. Current accommodation is in excess of what prevailed prior to the Great Recession and commensurately raises the risks of the Fed excessively tightening policy.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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