Trump and the Fed: Changes may be coming

Updated 9/16/17 to add a link to a quoted article from the Wharton School of Business.


Most people know that a president able to appoint several Supreme Court justices during his tenure will have an impact on our country that far outlasts their presidency. However, presidents who have the chance to make major changes to the Federal Reserve’s board of governors can also have a disproportionate impact.

Due to a combination of the facts that Federal Reserve Chair Janet Yellen’s term expires in January and that a seat on the Fed’s board of governors opened after President Trump took office; another member’s term expired; and Vice Chair Stanley Fischer unexpectedly decided to retire for personal reasons (as he announced on September 6), Trump has what many experts consider an enormous opportunity to change the Fed, its monetary policies, and how it oversees banks. Plus, Trump will also be appointing a replacement for the president of the New York Fed, another key player, whose term expires January 2019.

Janet Yellen

As far as Yellen, Trump was critical of her and of the Fed’s quantitative easing policies after the Great Recession as well as of the Dodd-Frank banking regulation legislation, which the Fed under Yellen has embraced, during the 2016 presidential campaign. But since the election he has warmed to Yellen, saying he respects her and would consider keeping her at the Fed. So, it is possible that like every Fed chair since the late 1970s, Yellen could be offered a second term by a president from a different party, as was Ben Bernanke with President Obama, with the same pattern going back to Paul Volcker. (Continued below.)

Janet Yellen. (Official Federal Reserve portrait)

The widely respected British magazine The Economist just published an editorial suggesting that Trump should reappoint Yellen, arguing that “a second term for her would provide clarity about the Fed’s future direction and independence, and make the other posts easier to fill.” In addition, this is an especially delicate moment in the economic and monetary policy cycle, and having someone who has not just academic knowledge but years of real policy experience would, in the magazine’s view, help to avoid what could be very costly mistakes such as raising interest rates too quickly or too much, which could choke off the economic recovery.

Trump’s Fed

As far as the potential candidates Trump might appoint to replace Yellen, initially there was considerable expectation that Trump would offer the post to Gary Cohn, his senior economic advisor and a former Goldman Sachs executive; but that now seems unlikely because of the president’s unhappiness about remarks Cohn made to the Financial Times criticizing the president’s response to the recent white-supremacist rally in Virginia.

If Trump does decide to replace Yellen, most economic experts hope that it will be with a traditional Republican/conservative economist rather than someone with truly radical views about the Fed’s independence and monetary policy, which could unsettle markets and the economy.

Fed watchers, as the Atlantic magazine recently explained, are now focusing on four people as possible Fed chairs under Trump: Kevin Warsh, a veteran of Wall Street who served at the Fed under President George W. Bush; Jonathan Taylor, a professor at Stanford; economist Marvin Goodfriend; and Glenn Hubbard, an economist at Columbia who has advised Republican politicians. What ties this group together is their criticism of the Fed’s recent policies, especially its expansionary monetary policy, and its increased regulation of banks and financial institutions.

Additional clues to Trump’s plans may come from the two appointments he has made, which have made their way through the Senate Banking Committee and are expected to be confirmed by the full Senate soon.  They include Randal Quarles as vice chair of supervision, who would oversee the banking system, and Joseph Otting as comptroller of the currency, who handles overseeing the operation of the largest banks.  Once Stanley Fischer leaves, which will be in mid-October, only three of the board’s seven seats will be filled.

While it is hard to predict how Trump’s Fed picks would act once on the board, they do seem to share some common goals, including potentially moving towards a more aggressive hiking of interest rates and reducing regulation and oversight of the financial sector.  In addition, a more conservative Fed would be expected to be less likely to utilize quantitative easing as a way out of a future recession.

But while Trump might seem to favor such Fed policies and orientations, it remains to be seen what would actually happen if such policies were pursued by future Fed members he appoints.  They might work, or alternatively might have harmful or unexpected effects on the economy and disrupt markets and lending, or the appointees might decide to follow the policies of their predecessors. It’s really up in the air at this point, especially since Yellen could be reappointed.

Even before the forthcoming changes to the Fed’s board were an issue, there were widespread expectations of another Fed rate hike in 2017, but recent softening of the economy as seen in job numbers and the initial economic impact of the hurricanes and tropical storms that devastated Texas, Florida, and other states seem to have put those plans on hold for the moment. All that could in theory change when Trump’s appointees are in place.

Why It Matters

These issues are not simply wonky matters of concern to economists and those who follow these issues but are important to all Americans and especially to gold and other investors, for several reasons.

First, the current vacuum in the Fed’s board is viewed as dangerous for the economy and for democracy by many experts. For example, Sebastian Mallaby, an economic expert on the Council on Foreign Relations, said that when the Fed’s leadership is up in the air, “that could be unsettling to markets, so unnecessary melodrama around the Fed chair reappointment is going to be bad news.”

In addition, Wharton School of Business professor Peter Conti-Brown points out that “Vacancies are bad for the credibility and legitimacy of the central bank because it concentrates power in fewer hands, which is antithetical to democratic principles.”

Plus, if vacancies were to remain unfilled for an extended period—which could happen either because Trump does not make timely appointments or the Senate does not approve his appointments—that could produce dysfunction within the Fed, said Conti-Brown, and could leave the Fed without a quorum, which is required to do things such as lending during an economic emergency.

Gold Standard and Trump

Most people interested in gold are well aware that monetary policy and whether it is tight or loose play a key role in shaping the outlook for gold prices.  If the Trump administration and the Fed in the coming years were to become substantially more hawkish, that would be a bad for gold and stocks, which tend to do well when rates are low. Low rates combined with low inflation, as we have had for the past decade, are a good environment for both gold and stocks, though of course other factors,such as supply and demand, are important as well.

Moreover, as an article from March in Politico explained, the gold standard could in theory return to the fore of policymaking under Trump because there have not been so many adherents of the gold standard with influence in the White House since the Reagan administration, which is when a committee was formed to study the idea.

Trump’s own views on gold and the gold standard, as discussed here in March, are unclear, as he has made some positive comments about the gold standard but has also noted it would be hard to implement, and he has not made any commitment to trying to bring it back. But several members of his transition team and top donors to his presidential campaign as well as individuals who were interviewed for the position of Treasury secretary all support the gold standard.

Most experts consider a return to the gold standard highly unlikely and unworkable. And it is worth remembering that the chances of a Trump-led push for the gold standard seem less likely now than they may have back in the spring, especially since the president has not made any recent comments on the issue.

At this point there are many question marks, such as whether Trump will reappoint Yellen or select a new Fed chair; whom he will appoint for vice chair and the other openings; what kind of monetary policies the Fed will pursue during the remainder of Trump’s term (which at least in theory should be based mainly on how the economy is performing rather than on ideological or policy preferences of the Fed’s governors); how much easing of banking regulation might occur and the impact that has on the financial sector; and how all of this will play out in the coming years depending on what happens to growth, jobs, trade, the dollar, and the budget deficit, which will shape the economic legacy of the current administration.

Louis Golino is an award-winning numismatic journalist and writer specializing in modern U.S. and world coins. His work has appeared in Coin World, CoinWeek, The Numismatist, Numismatic News, and COINage, among other publications. His first coin-writing position was with Coin Update.

In 2015, his CoinWeek.com column, “The Coin Analyst,” received an award from the Numismatic Literary Guild for best website column. By 2017, he received an NLG award for best article in a non-numismatic publication with his “Liberty Centennial Designs,” which was published in Elemetal Direct.

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Comments

  1. MarkInFlorida says

    While the Fed vacuum is considered unsettling, the stock market reached a new high today, and the best week of the year. When and why will the bubble burst? And might that send people into gold? We shall see.

  2. Louis Golino says

    OT, but pretty major: Did y’all hear how the LESPS will be limited to 50K? This is good news for the 2017-S proof, which will now solidify its status as a key coin. Those who sold their congrats sets for a song will be disappointed. Whether or not all 50K are sold, 2017-S is now the 4th lowest mintage coin of the whole series, the 2nd lowest proof after 95-W, and the lowest proof from S.an Fran.

  3. says

    The problem IS the Fed – they don’t answer to the congress, or to anyone in government because they are not a government entity. We buy money from them and have to pay it back at interest. So every dollar that’s printed, puts us further into debt that can never be repaid (repaid with WHAT? – we bought the actual dollar from them and owe interest on that dollar – so there’s never going to be enough money to repay the money printed). It’s one of the things that’s really wrong with the world.

    If the government would start printing its own money without the involvement of the Fed, we would have money not based on debt. Some say it’s why Lincoln, and JFK, were offed. They were each assassinated shortly after implementing government-issued currency not based on debt.

  4. cagcrisp says

    @Louis, Another fact filled well thought out article. Thanks.

    I’ve always thought that Trump would reappoint Yellen for the mere fact that IF things go South he has someone to blame as a “holdover” from the Obama administration.

    IF things go good, as is the stock market, It’s because of Trump and IF things go bad, it’s because of “the mess he inherited”

    IF Yellen wasn’t reappointed I wanted Gary Cohn, but as Louis pointed out, once he criticized Trump about Charlottesville he lost favor…

  5. MarkInFlorida says

    Yes, too bad about Cohn. There was nothing to criticize about Charlottesville. Antifa is a terrorist organization, so Trump was right.

  6. So Krates says

    @ MarkInFlorida – You are making the same mistake the President makes. You implied a moral equivalency between two unequal groups.

    “Antifa” is not even an organization, let alone a terrorist organization. Who is the leader? Can you name any members? Where are the headquarters? The mailing address? The publication to which I can subscribe to read their credo? What is the recruitment process?

    Which group would be happy to exterminate Gary and his entire family for fun?

    Which group would hide them in the attic?

  7. cagcrisp says

    APMEX is selling Mexican gold pesos at Spot. Random years.

    One week ago Today Gold “ask” was Over $1,350.00 and yet…

    …No spot Gold sales at $1,350.00 and Now at $1,322.00 they put them on sale for Spot price…

    That should tell which direction APMEX Thinks the Gold market is going…

  8. Tom says

    @ Gold man. Our favorite “coin dealer ” last evening on HSN was peddling the Enhanced Cent for only 49.95.

  9. Mattarch says

    Nice Article Louis. Since we are talking about the FED. Could the FED do an end around Congress by deciding they want to discontinue the cent and just stop ordering them from the Treasury. Would that fairly quickly eliminate the use of the cent, similar to many other countries?

  10. Louis Golino says

    Thanks, Mattarch. I believe only the Treasury has that authority, but it’s a good question, and I am not sure of the answer. If you think back to the dollar coins that were piling up in Fed vaults and incurring storage costs, it took a decision by the Treasury Sec for the Mint to stop making them for circulation. So if the Fed stopped ordering cents, perhaps the same would happen unless Treasury intervened.

  11. Barry says

    The people are not responsible for making the cent of little value. Why then should we have to do without because of their financial mismanagement ?

  12. Dustyroads says

    Nice article Louis.

    No, I hadn’t heard that the LESPS was in fact limited to 50,000. That’s fantastic news!

    Okay, just read the CW article. HHL set at 2 sets with pricing at $139.95
    I was hoping for a HHL of 5, but at 2 they will sell out fairly quickly.

  13. says

    Are the EU Sets actually gone now? Is it possible? We’ve seen a lot of restocking of a lot of different US Mint items so ………………. only time will tell.

    🤗

    Christmas time would be the perfect time to see the last 20,000 I’ve read about, make a miracle reappearance .

    🎅

  14. earthling says

    Sith

    That’s great News. You took a US Mint ” Never Ending Junk Coin Pass” and got a Pass for food! Something that you actually need. Fantastic!

    Please share the details. Maybe some of us out here in the Coin World can transform our experience into something useful, also.

  15. Sith says

    @earthling – Nothing really to say, the story will be familiar to any of the older readers. You open multiple tabs in multiple browsers, then one of them get stuck in a waiting room, until you can place the order.

  16. Sith says

    @earthling – One major difference the “sold out” sign came up before you could hit the fourth browser tab

  17. says

    Does anyone know the details of when the authorized dealers are going to offer the American Eagle palladium one ounce coins?

    Cost?

    Thanks & Semper Fi

  18. KCSO says

    Silky – No;

    I have pre-sale alerts set with 4-5 retailers and have checked for updated articles daily since 01 September and it’s been crickets.

    Back around 01 September, Pallidium shot up $48 in one day, with additional subsequent increases; I suspect attributable to Harvey and the need to replace 500,000+ vehicles, and the mint sourcing the planchettes, if so, then striking is under way.

    So we may hear something this week; watch Coin World for an update.

    APMEX, when viewing the ‘recently viewed line on their home page, shows that they’ll offer it around $104 over spot. I’m looking to pick it up around $44 over spot. I may not win that one.

    I’ve noticed recently that Palladium trades very independently from Pt, Au, & Ag; very intriguing watch sometimes, I presume because it’s such a thinly traded market with limited mine/extraction capacity.

    Bottom Line – Expect to see a price tag from $980 to $1,040. Oh Joy!

  19. KCSO says

    Silky – since you brought it up and just for fun,

    I’d like to see 20,000 pieces struck or less,

    My Guestimate will be a total distribution to the AP’s of 30,000.

    At an average sale price in the ‘hood of $1,010.95; I can’t help but to wonder the strength of demand, or lack there of, will be.

    Anyone else committed to it? What’s the over all interest, homies?

  20. A&L Futures says

    @ Silky —

    Bullion Exchange has the Palladium American Eagle as a pre-sale on its website. The have a few options available, but honestly — they’re a bit high.

  21. KCSO says

    $1,075 for 1 with cash – HAHAHA, yeah right.

    I’m anxious to see if the markets respond tomorrow to Trump’s comments while addressing the UN GA.., with the North Korean delegation in the front role.

    With my luck, PM’s will rocket 5-7% and everyone will unleash their pre-sales.

  22. says

    On the subject of Palladium I got a 1/10 oz piece from the Moonlight Mint last year. The metal itself is a white metal that looks a lot like Silver. If the token wasn’t marked as Pd it would be hard to tell it from Silver. I will be watching this US Mint release with mild interest from the sidelines. My curiosity for Palladium was satisfied with the Moonlight Mint piece.

  23. Louis says

    Provident is selling the gold walker centennial coin for $695, which is about $35-40 over melt and $200 under USM price.! Seems like a good deal if you think gold is going to be higher down the road. I wonder how they can sell them this cheap. I

  24. data dave says

    @Louis – Provident must be buying them from the public for less than $695. I was in a coin shop over the weekend and the premium on the 2017 silver panda was much higher than the other years. The owner told me that they get the other years from customers cashing out but they have to buy the 2017 from other dealers.

    So either Provident has some extra stock of their own that they are trying to dump, or that is the true secondary market price right now.

  25. A&L Futures says

    I’m not sure if this was already published, but I was surprised by the HHL.

    American Liberty 225th Anniversary Silver Four-Medal Set

    Item Number: 17XD
    Mintage Limit: 50,000
    Product Limit: 50,000
    Household Order Limit: 2

  26. earthling says

    HHL of 2 tells me the Mint can learn. No more orders of 20,000 followed by a 20,000 item return or cancellation. Also when a limit is placed on something it seems to be more desirable to most people. Marketing 101.

  27. So Krates says

    @ Sith – We care…Nice job snagging the Never Ending Pasta Punishment Pass! I’m sure your primary care physician cares too. Heard 22,000 were gone in literally one second. Shows ya where America’s priorities are. You gotta go at least ten times in eight weeks to make it worth it. Are you a true eater or a flipper?!?

    I got turned off to Olive Garden when I heard they stopped salting their pasta water to preserve the useful life of the cooking pots…now that’s where I draw the line! 🙂

  28. Louis says

    Gold walkers are sold out. Good luck trying to get one now at that price since the latest
    eBay sales are in the low-to-mid $800’s. They probably just needed to pay some bills or whatever
    and needed some quick capital.

  29. Sith says

    @So Krates – You assume they need salt water to boil food\pasta packets. 🙂 Now saying that I once went to a “fancy\local” Italian restaurant, and the wife was served frozen eggplant. Not that the wife minded, it tasted delicious, but why pay the middle man, when you can heat it up yourself at home. Anyway “the punishment” is for the wife, and she will use it. I myself have not eaten at Olive Garden in years, but imagine I will be getting my fill for the next 8 weeks. BTW you can’t flip the the pasta cards anymore, starting this year you have to provide a name for the card.

    FYI
    CNN determined that Olive Garden does send its chefs and managers to a Tuscan restaurant/bed-and-breakfast, but there isn’t an official school, per se”…apparently “they spent more time sightseeing and exploring Tuscany than learning how to cook authentic Italian food.” And I love this from Darden Restaurants itself ,in their promotional material, the Olive Garden is the “largest chain of Italian themed restaurants in the nation. ” I understand that Outback is Australian-themed, but servers American Cuisine, but an how you go from Italian restaurant, to Italian themed restaurant?…Pastachetti, anyone?

  30. earthling says

    Too many intense storms of all sorts are brewing on the horizon. I just want to crawl under a blanket and clutch my Silver and Gold Pandas tightly to my chest.

    😥

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