Yellen's Odds of Being Reappointed Get Slimmer
The Federal Reserve Bank of Kansas City’s annual Jackson Hole conference offered little direct insight into the path of monetary policy for this year and next. But that doesn’t mean it was a nonevent. Perhaps the biggest takeaway is that the already small odds of Chair Janet Yellen being reappointed by the Trump administration when her term ends in February just got a lot slimmer.
In her speech, Yellen gave a clear defense of greater financial regulation by detailing the response to the vulnerabilities exposed by the financial crisis and ensuing Great Recession. In fact, she sees it as a work in progress in what can only be called a refutation of the Trump administration’s anti-regulatory approach:
Nonetheless, there is more work to do. The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth. But many reforms have been implemented only fairly recently, markets continue to adjust, and research remains limited. The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system.
Yellen’s position is that a well-regulated financial system will yield higher growth over time by reducing the frequency of financial crisis. While she is open to revising regulations as the impacts become clear -- she mentions mortgage and small business lending specifically -- Yellen clearly opposes taking an ax to the post-crisis framework.
In other words, Yellen would be a fly in the ointment of any anti-regulatory agenda, and this isn’t an administration that appears willing to retain Democratic appointees, regardless of their competency.
One would think that a diminution of Yellen’s odds for reappointment would raise the chances for the person widely seen as the current front-runner, National Economic Council Director Gary Cohn. But, he may have undermined his chances by challenging the administration’s response to Charlottesville. That throws the spotlight on another oft-mentioned candidate, former Fed Governor Kevin Warsh.
Ultimately, policy implications will depend on how aggressively any Trump appointees adopt an anti-regulatory agenda. If such talk turns out to be mostly bluster, the regulatory environment will remain mostly intact. But if deeper action occurs, it is reasonable to expect an increase in risk taking in markets and leverage with positive economic implications in the short-run at the risk of greater instability later.
Although Yellen did not comment directly on monetary policy, her decision not to repeat comments she recently made about asset values being “somewhat rich” is important, for if she had done so she would have been seen as signaling support for the more hawkish faction within the Fed. There is no reason Yellen needs to take a stance on this now. Most likely no decision to raise rates would be made before the December meeting. That decision, all else equal, will depend on the interplay between inflation and unemployment -- both actual and forecasted -- between now and then. My expectation is that further declines in unemployment will trump weak inflation in the ultimate decision.
Still, financial conditions will play a role. It is useful to break the financial conditions into two parts -- financial instability versus financial accommodation. If Yellen believes the current regulatory framework leaves the financial system more resilient, she will be less likely to push for rate hikes on the basis of high asset prices.
That said, high asset prices can add to elevated levels of financial accommodation. Coupled with low interest rates and a weaker dollar, the overall level of accommodation appears to the Fed to be falling since the tightening campaign began. This should feed into more optimistic growth forecasts and thus argue for retaining the current expected rate path despite low inflation.
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