The author is the professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.
President-elect Donald Trump has the opportunity to remake the Federal Reserve.
Or does he? And if he does, what would it look like?
Trump has opinions on monetary policy – and they resemble many of his other opinions in that they are flexible. Early in his campaign he praised a low interest rate environment. Later, he accused Federal Reserve Chair Janet Yellen of holding interest rates low to help support President Barack Obama and in the process create a "false" economy. Despite this mix of praise and criticism, Trump Economic Advisor Judy Shelton, claims that his administration will respect the Fed's independence.
Given Trump's mixed messages, speculation on the future Fed is just that, speculation. Still, begin with what we know. Trump can nominate two governors to fill open positions on the Fed Board immediately. Yellen's position as chair expires Feb. 3, 2018. Trump previously stated he would replace her with a Republican. That would be a third spot.
Or would it? Technically, Yellen's spot on the Board does not expire until 2024. While it would be expected that she vacated the board when she vacates the chair, it is not required (and indeed former Fed Chair Marriner Eccles remained on the board after his chairmanship expired). Yellen could stay on as a thorn in the administration’s side.
In the financial community, questions are being asked about how long Vice Chair Stanley Fischer nor Governor Daniel Tarullo will stay on. The election of Trump could affect their calculus, prompting them to remain until their terms end, in 2020 and 2022, respectively. Governors Lael Brainard and Jerome Powell can hold their seats until 2026 and 2028, respectively. Brainard, obviously, will not be headed to the U.S. Treasury as some had speculated she might under a win by Democratic Nominee Hillary Clinton.
In other words, fears that Trump would be able to remake the board immediately are premature. Indeed, the Fed is structured to prevent just such an occurrence. We forget this because turnover has been high in recent years. But it could slow dramatically, especially if current board members remain to protect the institution's independence. Trump's two nominees, one of which may become chair in 2018, would not by themselves form a significant voting bloc even if so inclined to pursue a dramatically different policy than the current Fed.
Under this path, the Fed retains much of it current identity with the possible change of dissents shifting from regional presidents to board members. One could even imagine the chair as one of the dissenters (Eccles was also the last chair to cast a dissenting vote). But overall the Fed's reaction function, and hence the expected policy path, would remain familiar to market participants.
There are two possible branches from this path. One is that the Fed continues to follow policies consistent with "best practices" in central banking and the administration respects its independence. This is the best of all outcomes.