Trump and the Fed

Vito Racanelli of Barron’s ponders the Federal Reserve‘s future in the age of Trump.

One coming change few are pondering is the turnover at the Fed now that Donald Trump has the power to appoint Fed officials. By about mid-2018, there could be as many as five new Trump appointees out of 12 FOMC voting members, including the chairman, a role with weight in the FOMC. Current chair Janet Yellen’s term is up in February and few see Trump reappointing her.

Throw in normal rotational changes and there might be as few as four Fed FOMC veterans as voters then, according to David Kotok, a savvy investor, and chairman and chief investment officer at Cumberland Advisors.

Trump’s speech “exceeded expectations,” says Kotok, but there was no mention of the Fed. At some point, the Fed will become the topic du jour in the new administration.

It’s worth wondering what kind of Fed officials Trump might select. The risk is that people who have this president’s ear have little central-bank depth and experience, Kotok adds. And this longtime Fed watcher asks what the president’s view of the central bank and interest rates might be, given Trump’s experience in real estate, where, says Kotok, it’s “borrow, leverage, and use tools that diminish debt service.”

Handling a debt burden—particularly one that might rise on Trump’s infrastructure promises–is easier under an accommodative money policy that allows some inflation to soften interest payments. Indeed, over the past 20 years of sharply falling interest rates, the cost of maintaining significantly higher debt has actually fallen relative to total federal spending, even though the U.S. total public debt has quadrupled to nearly $20 trillion, according to a report from Gerstein Fisher.

Fed leadership without experience and grounding in the history and nuances of monetary policy and economics runs a higher risk of making a mistake, Kotok worries.

Will Trump repeat President Jimmy Carter’s error of appointing William Miller as Fed chairman in 1978? Miller came from a corporate background with little financial-markets experience, and he proved too dovish in an inflationary time, lasting less than two years in the job.

A Trump Fed might be more accommodating than even the current Fed, which many have criticized for keeping rates too low for too long. “A new Fed might be more reluctant to take away the punch bowl at the right time…and the market isn’t pricing this risk in, says Kotok. Investors should look past the ides of March.

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