Markets are blowing off this uncertainty for now.
On Thursday, the Senate confirmed Randal Quarles, President Trump’s first Fed nominee, as a member of the Federal Reserve Board of Governors. During his confirmation hearing, Quarles said it was time to roll back some of the regulations that were imposed on banks after they’d imploded and threatened to take down the global financial system. He will become the chief bank regulator at the Fed, filling the slot that Daniel Tarullo left behind when he resigned unexpectedly in April.
Quarles is founder of private investment firm, The Cynosure Group. Fed Governor Jerome Powell is also a Cynosure alumnus. Quarles had been a partner at private equity firm The Carlyle Group and served as undersecretary of the Treasury under President George W. Bush. WHIRRRR makes the revolving door.
One down, four more to go.
The Fed’s Board of Governors has seven slots, currently chaired by Janet Yellen. After Quarles’ appointment, potentially four more will need to be filled over the next few months.
The seven board members are part of the policy-setting 12-member Federal Open Markets Committee. The other five members of the FOMC are the president of the New York Fed and on a one-year rotating basis four presidents of the remaining 11 regional Federal Reserve Banks.
First, there’s Chair Janet Yellen, whose four-year term as Chair expires in February. Trump, after skewering her repeatedly during the campaign for keeping interest rates artificially low, has warmed up to her, because now he likes low interest rates. But he said that he hasn’t made up his mind whether or not he will reappoint her. Meanwhile, he is looking at a panoply of other candidates.
Then there’s the Vice Chair. Stanley Fischer resigned unexpectedly in early September. His last day on the Board of Governors will be October 13. He has been one of the key proponents of reversing low interest rates and unwinding QE.
And there are two more slots open on the Board of Governors that Trump will likely fill over the next few months.
“The amount of turnover, the number of vacant seats, I think this is historically unprecedented – certainly in my lifetime,” explained Alan Blinder, Vice Chair of the Fed’s Board of Governors from 1994 to 1996, and now an economist at Princeton.
Markets have so far blown off this uncertainty.
At least since President Reagan, new Presidents have reappointed the prior Fed Chair for at least one more term, even if the Fed Chair had originally been appointed by a President of the opposing party. It was done to give markets a sense of stability, continuity, and confidence. Each of those reappointments had been communicated to the world early on.
But this is October, and still no one knows who will run the Fed next year, who will be the vice chair after October 13, and who will fill the other two vacant slots on the Board. Trump could reappoint Yellen for the sake of stability, but I doubt it. I think he will use this historic opportunity to shape the Fed.
The Fed is an enormously powerful institution. It has the tools – open market operations, the discount rate, reserve requirements, and asset purchases (“money printing”) – to interfere massively in the credit markets. It moves short-term interest rates by targeting the federal funds rate. It has the ability to manipulate down long-term rates via jawboning and outright purchases of Treasury securities and mortgage-backed securities of all maturities. It can let long-term yields rise by unwinding QE, which it has started to do this month. It regulates banks and has presided over the Financial Crisis when these banks threatened to collapse. And it serves as lender of last resort to banks and corporate America when their bets turn to dust.
The Fed has been riding its experimental monetary policies since 2008. In its function as lender of last resort, it also used short-term loan programs to bail out banks and Corporate America during the Financial Crisis when credit froze and companies could no longer borrow in the markets to cover their daily needs. This included industrial companies, such as GE and Caterpillar. These short-term loans have long been paid back.
The Fed has crushed savers and the earnings power of their $9 trillion of life savings on deposit at banks. This policy was designed explicitly to transfer wealth from savers to banks, in order to recapitalize the teetering banks and enrich their investors. The economy has suffered from this as the cash flow that savers – many of them retirees – were counting on just disappeared, and these folks had less money to plow back into the economy.
The Fed has assiduously inflated asset prices, going from the dotcom bubble to Credit Bubble 1, which included Housing Bubble 1, to the current Credit Bubble 2, the largest credit bubble in human history, which has become the “everything bubble,” including Housing Bubble 2. The prior two bubbles imploded with great fanfare.
The Fed has been working tirelessly to shift wealth around. Labor and savors have gotten shafted. Asset holders benefited. It’s a well-oiled machine. This machine has shifted into reverse recently, raising rates in slow and tiny increments and unwinding QE, with new winners and losers down the line.
But now uncertainty reigns about this machine. No one knows who will run it, and some of the key components are still missing. The QE unwind as planned has unanimous support in the current makeup of the Fed and is likely to continue. And another rate hike in December is likely. But starting next year, interest rate policy is a big unknown. The new lineup could be more hawkish or more dovish, or it could be off the chart entirely, and no one knows.
But two things we can already see after the Quarles appointment: Bank regulations will be weakened, and the revolving door between the Fed and Wall Street will whir loudly.
Central bank interventions have created a new record in central-bank absurdity. Read… The Pricing of Risk is Kaput
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.