It would be disingenuous to say that Donald Trump plans to make the Federal Reserve great again, for the Fed was never great in the first place (unless you happen to own stock in one of our nation’s largest banks). Yet opportunity knocks on many doors once a new president comes to Washington.
Just as Trump gets the chance to change the face of the nation’s laws by appointing a justice to the Supreme Court, he also has the unique opportunity to influence monetary policy for the course of many years to come with the appointment of a governor to the board of directors.
Under Obama’s guidance, the Fed helped to strangle economic recovery since the Great Recession by sitting stubbornly on interest rates, resulting in banks getting paid to take cash from the government instead of the other way around. Only after five years of sitting on their hands did they finally raise interest rates, doing the bare minimum to keep the dollar from going the way of the yen.
Ben Bernanke and Janet Yellen’s tenure as the chair of the Fed resulted in trillions of dollars of taxpayer money dumped into the economy, with cash printed like it’s going out of style to make up the difference. The result was an economy built on a kickstand and the $20 bill in your wallet being worth less each day as the greenbacks flew off the printing presses.
No more. President Trump’s views on monetary policy weren’t strongly emphasized during his campaign but it is safe to say that his vision of the Federal Reserve is one where interest rates are kept high enough to prevent a deflationary spiral. Trump did take the time to specifically criticize Yellen for being too loose with the reins, echoing similar criticism from Republicans in Congress who realize that with unemployment below 5%, full employment ought to be withheld to keep inflation under control.
His chance to make this belief a reality has come with the resignation of Daniel Tarullo, an Obama appointee who announced his resignation come April. Tarullo, like many Obama cronies, has seen the writing on the wall for their future.
While Obama was pleased to reward Tarullo for his part in enforcing the disastrous Dodd-Frank Act that all but killed off small banks in America, Trump has stated that Dodd-Frank is, along with Obamacare, one of the very first policies to be put on the chopping block as he starts his presidency.
With Tarullo’s departure, Trump has no less than three open board seats on the Federal Reserve to fill. It’s a fantastic opportunity, not in the least because there are only seven seats total, but because in less than one year Yellen’s time as chair will come to a welcome close. She might also resign her seat as governor, furthermore, once Trump makes it clear that her ideas belong on the ash heap of history. A majority would leave the Fed in the hands of hawks rather than doves (in monetary policy, a hawk refers to someone more concerned with inflation than unemployment; a dove vice-versa) for the foreseeable future.
Republicans have long clamored (correctly) that the Fed is beholden to bankers and not Americans. Even George W. Bush couldn’t bring the Fed into the line of Congressional oversight with a Republican House and Senate, but Trump’s opportunity comes at a unique time where change is truly in the air.
Republican support in both houses of Congress might give Trump the tools to bring the Fed in line with the Government Accountability Office, resulting in our central bank finally making decisions at the behest of Congress rather than their own agenda.
Some conservatives want to go further by setting interest rate according to an algorithm and demanding that the Fed be answerable for any changes from this line, though this is likely a pipe dream.
Regardless of the degree of reform, there can be little doubt that reform cometh. Trump’s most likely appointees to the Federal Reserve include John Taylor of Stanford University, who originally authored the changes that many Republicans argue for today. Taylor is an example of a Trump economist who won’t play fast and loose with monetary policy, instead adopting higher interest rates that put pressure on banks rather than their customers, and ensuring that huge cash dumps don’t devalue the dollar any further.
Regards,
Ethan Warrick
Editor
Wealth Authority
