There has been some speculation in the weeks since Donald Trump was elected president that the Fed would be in for some drastic changes in the coming years. While Janet Yellen has indicated that she is not prematurely stepping down from her role as Chair of the FOMC in January 2018, it seems unlikely that she will be reappointed following the end of this four-year term. She could even buck tradition and opt to stay on as a governor and serve out her 14-year appointment. On the heels of the Dodd-Frank Act changes being implemented, and with a GOP-led House and Senate there is likely to be a much more hawkish future Fed Chair and far fewer regulations on banks and banking. There may also be several changes to the Fed mandate in coming years, either requiring a GAO audit of policies, requiring rule-based policy, ending their emergency lending powers, or changing the makeup of the FOMC to hand some power from governors to presidents. It is even possible that the next Fed Chair would be someone not so interested in keeping the Fed around at all.
It appears the Trump administration will be nominating Steve Mnuchin as Treasury Secretary. However, the Trump administration has entertained the idea of selecting John Allison as Treasury Secretary, a former bank CEO who favors eliminating the Federal Reserve and returning to the gold standard. Of the other leading potential picks for the job, Jeb Hensarling–current chair of the House Financial Services Committee–has also been highly critical of the Fed. Hensarling’s criticism is more in line with those who want more transparency and accountability from the Fed. These possible picks for Treasury are distinctly at odds with those views from Janet Yellen, who notes that expansive spending programs while at full employment would likely result in inflation. Furthermore, those who are considered for Treasury Secretary are often later considered for Chairman of the FOMC.
Note, that the Fed–along with the FDIC–is in charge of regulating much of the banking system. Perhaps there are too many regulations on things such as capital and reserves leading to slower growth, or perhaps there is too little being done to prevent the next bubble.
Questions you might consider:
- How would you expect markets to react to any of the prospective policy, rule, or regulatory changes. You might also consider the economic changes due to these potential Treasury/Fed selections.
- Has anyone else discussed what might happen if the new administration’s economic policies are put into place while the economy is operating at its current level? What changes do you expect the Fed to put into place if there are significant increases to government spending or more tax cuts? How would the Fed go about doing this?
- How would you expect structural changes to the Federal Reserve to impact functioning of the financial markets and banking systems? If the FOMC shifted to having more power in the hands of presidents, instead of governors, what changes would you expect to occur?