Posted by on November 9, 2016 3:52 pm
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Categories: Alan Greenspan American people of German descent Ben Bernanke Board of Governors Business Chair of the Federal Reserve Deutsche Bank donald trump Economy federal reserve Federal Reserve System Fellows of the Econometric Society goldman sachs Guggenheim Fellows Jan Hatzius Janet Yellen Monetary Policy Paul Volcker Politics President Obama US Federal Reserve yellen

One of the burning questions troubling Wall Street this morning, now that stocks have managed to successfully absorb last night’s limit down selling and most recently were trading at highs of the day, is whether president elect Donald Trump plans on reshuffling the Fed, eliminating its so-called “independent” and perhaps going so far as firing or “requesting” Janet Yellen’s resignation.

According to T. Rowe Price’s chief economist, Alan Levenson, Trump’s proposals “threaten to undermine global faith in the independence of the Federal Reserve and the geopolitical standing of the United States.” Others, such as FBR’s Edward Mills went further: “The future of Janet Yellen’s chairmanship and the accommodative nature of Fed monetary policy are in doubt.” Deutsche Bank strategist George Saravelos had a similar view: “the market will be looking for confirmation that Chair Yellen will not resign. Trump has been particularly critical of her term so policy continuity will be particularly important.”

So to answer the question whether or not Yellen’s role is in jeopardy, we went to the two most authoritative sources available: the two biggest and most influential US banks: JPMorgan and Goldman Sachs. In a note written on November 7, before Trump’s election, JPM’s chief economist Michael Feroli asked “If Trump wins would Yellen leave?” and answered: “In a word: no.”

He added that while Trump has grown increasingly critical of Fed Chair Yellen, “her term as Chair does not expire until early February 2018, and her term as Governor extends to January 2024. The Federal Reserve Act only permits the President to remove a Governor “for cause” and historically this authority has never been abused by the President. For example, even Nixon did not try to remove Chairman Martin in the 1968-1970 period, even though he believed Martin’s monetary policy may have cost him the 1960 Presidential election.”

He then lays out another theory that Yellen would resign if Trump were elected. JPM says that it sees “no historical precedent for this. In contrast, there are plenty of precedents for a Chair appointed by a President from one party to continue serving under a President from the opposite party. In fact, since the Treasury-Fed Accord of 1951, every Fed Chair has served under Presidents from both parties, except for Yellen (so far) and the luckless G. William Miller. Moreover, we don’t see a rationale for the apparently Democratic Yellen to give President Trump even more influence over the course of monetary and regulatory policy by immediately stepping down. That said, we doubt she would stay on as Governor even after her term as Chair expires. While this is legally possible, every Chair since Eccles left the Board after their term as Chair ended.”

And then there is Jan Hatzius, Goldman’s chief economist, who also in a note from the day prior to the election asked “will Janet Yellen continue to serve as Fed Chair after the election?” Here is his response:

Yes, at least until her term ends in February 2018. Chair Yellen was appointed by President Obama to a four-year term ending February 3, 2018 (and simultaneously to a term as member of the Board of Governors ending in 2024). In contrast to some reports, past Fed chairmen have not customarily offered their resignations to newly elected presidents. For example, according to his memoirs, former Chairman Bernanke deliberated whether he would accept a reappointment, but never offered to resign. Similarly, Alan Greenspan was apparently unsure about his prospects for reappointment under President Clinton because, as he put it, Clinton “was a Democrat and no doubt wanted one of his own.” But he does not seem to have considered resigning.

In earlier years, Fed chairmen sometimes resigned their post, or at least offered to do so. Paul Volcker considered resigning after famously losing a vote to change the discount rate in 1986, but ultimately decided against it. Upon reappointment by President Reagan, Volcker indicated that he planned to serve only two years of his four year term, but in fact offered his resignation just two months before his term expired. William McChesney Martin—Board Chairman from 1951-1970—offered to resign when President Eisenhower was elected, because he was a Democrat and Eisenhower was a Republican; the new president asked Martin to stay on as chairman. Martin made no offer to resign after the next four presidential elections, and in fact made a point of not resigning in 1960 after then-Senator Kennedy criticized the conduct of monetary policy while on the campaign trail.

Thus, while there is some precedent for the Fed chairman to resign upon a new president taking office, it looks more the exception than the rule, and has been uncommon in modern Fed history. In any case, we think Chair Yellen is very likely to serve out her full term, regardless of who wins the election.

In other words, at least when it comes to Wall Street, i.e., those who indirectly instruct the Fed what to do through their governorships, Yellen is safe. Then again, it was the same Wall Street experts of whom not a single one correctly predicted a Trump victory. Which is why one had to go off Wall Street forecasts, we would certainly be concerned about the tenure of Janet Yellen, and certainly pay close attention to what Trump says on the topic during his next media appearance.

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