You may remember that in early September I wrote about the Federal Open Market Committee (FOMC) – basically, the Fed officials who vote on monetary and interest rate policies, which govern a massive part of our economy. They try to guide our economy through the booms and busts of business cycles (how well you think they do that probably depends on how your portfolio looks).
These all-but unknown folks have their hands on the levers of the economy, so I took a look at the FOMC voting member backgrounds and asked: what qualifies these people to decide if savers get punished with lower interest rate payments or borrowers get access to loans with reasonable repayment terms? What qualifies these Fed officials to tinker with the value of the U.S. dollar by experimenting with unproven academic theory?
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After eight years of tinkering and experimenting with tools that created asset bubble after asset bubble, these policies haven’t magically created jobs or corporate revenues. They have made it far too easy for companies to buy back their own stock, which in turn makes it look like those companies are more profitable – and all while fueling a stock market bubble for good measure.
So with a new U.S. President-elect, what will the Fed look like in the near future? Will Trump try to fire Fed Chair Yellen? Will the new appointees really make any difference at the Fed? Let’s take a look at who’s on deck…
The voting members are split into two groups: the Board of Governors (BOG) who are political appointees, and regional Federal Reserve Bank presidents. In my last article, I highlighted the backgrounds of the 2016 voting members. Since the BOGs are appointed to 14-year terms, nothing is due to change until 2018.
Sure, the new president-elect could ask for Janet Yellen’s resignation but her term as Fed Chair is up in early 2018 anyway. He might want to focus on getting his picks on the BOG first since there are two vacant spots that need to be filled and confirmed by Congress. My guess is that she serves out her term as Chair and resigns from the BOG in 2018 (her term on the BOG is up in 2024).
Stanley Fischer’s term as Vice Chair is also up in 2018, which only adds to Trump’s potential influence on the Federal Reserve and monetary policy. He will appoint a new Fed Chair and Vice Chair in 2018 and then will most likely need to appoint two new members of the BOG. Fischer and Yellen will most likely leave the Fed (if they stay until 2018) so, Trump will need to appoint four voting members of the FOMC within a year (including a new Chair and Vice Chair).
William Dudley, President of the Federal Reserve Bank (FRB) of New York is a permanent voting member of the FOMC as long as he is president. While he holds a Ph.D. in economics, he has actual banking experience with Goldman Sachs and Morgan Guarantee.
The other three BOG appointees have terms that expire in 2022-2028 so unless Trump get re-elected, he’s stuck with them.
The incoming voters (January 2017) from the regional Reserve Banks mostly come from academic backgrounds – Charles Evans (President FRB Chicago) and Patrick Harper (President FRB Philadelphia – but there’s some real-world experience sprinkled in there). Robert Caplan (President FRB Dallas) got his MBA from Harvard but was also a big-wig at Goldman Sachs and served on several corporate boards. Neel Kashkari (President FRB Minneapolis) got his Ivy-league MBA from the University of Pennsylvania and cut his teeth at PIMCO and Goldman Sachs – he also established and led the Office of Financial Stability and oversaw the Troubled Asset Relief Program (TARP) under Presidents Bush and Obama.
So, of the known ten voters on the FOMC in 2017, not much has changed. Five voters are politically connected, not including Chair Yellen or Vice Chair Fischer who are as well. Four have actual business experience and the rest have academic or legal backgrounds.
But why does it even matter? The Fed isn’t influenced by politicians! Except when they are.
Congress overseas the Federal Reserve System and its entities, which include the BOG (who are appointed by the President and confirmed by Congress), the FOMC and the Federal Reserve Banks. The Board of Governors is an independent agency of the federal government but isn’t influenced by political considerations, or so they say…
The 12 Regional Federal Reserve Banks are organized like private corporations because they’re separately incorporated and have their own board of directors. But ultimately, the Reserve Banks don’t operate for profit and member commercial banks are required to own a certain amount of stock in their district’s Reserve Bank. Also, by law, the Reserve Banks are required to transfer net earnings (after expenses, dividend payments, and required surplus fund) to the U.S. Treasury.
In fact, over the last two years the Fed has transferred over $200 billion to the U.S. Treasury! Maybe the Fed considers itself “politically independent” but I doubt if our political leaders do.
If the Fed hikes rates too rapidly, interest on the U.S. debt will explode and cut into government fiscal budgets. If the Fed tapers their $4 trillion U.S. Treasury bond holdings, the transfer payments to the U.S. Treasury will decline as well.
We’ll soon find out who Trump will appoint to the Board of Governors and who he will replace the Chair and Vice Chair of the FOMC with. I hope his appointees will include persons with practical business experience and an understanding of how the economy functions. It might be telling that his frontrunner for the Treasury Secretary gig is a former Goldman Sachs banker, movie producer, and hedge fund manager with no governmental experience. This approach could translate into a Fed that knows its limitations and actually operates in the publics’ best interest!
In the meanwhile, the political pressure will continue to stay on the Fed until the federal government gets its fiscal house in order. Unfortunately, the Fed has proven its policies are a failure and fiscal reform by our government is pure fantasy.
Whoever Trump appoints and whatever the Fed may or may not do, ultimately doesn’t really matter. Overreaction to what happens in long-term Treasury bonds is one way Treasury Profits Accelerator subscribers continue to profit.