Trump’s Next Shake Up: The Fed

Get ready for the Trump administration’s next shakeup…the Federal Reserve. As Fed Chair Janet Yellen heads into her semi-annual testimony before Congress, she knows the score--this is probably the penultimate appearance at what is likely to be a historically short term for a Fed Chair.

Yellen’s term as Chair expires in February 2018 and during the campaign, candidate Trump said that he would “most likely” replace her, because “She is not a Republican”. After the Fed chose to hold rates steady last September, Trump bitterly said, “I think she [Yellen] should be ashamed of herself.” In addition to Yellen, Vice Chair Stanley Fisher will conclude his term in June 2018.

The President will eventually fill those two vacancies from among the current Fed Board members and then both would face Senate confirmation. But before that occurs, the President will be able to quickly shape monetary policy by naming appointees for three open positions of the seven-member board of governors, all of whom are voting members of the twelve-member Federal Open Market Committee (FOMC). (The Fed has not operated at full capacity since 2013, due to political gridlock.)

On Friday, Governor Daniel Tarullo, the top Federal Reserve official charged with bank regulation (a position that was created post-Dodd-Frank) said that he would resign, “on or around April 5.” The other two spots are for the vice chair of banking supervision and a community banker.

Changes of Fed personnel would likely mean a shift away from academics and more towards business-minded governors. David Nason, a former deputy to Treasury Secretary Henry Paulson in 2008 and General Electric executive, is a name that has been mentioned to fill the Tarullo post and John Allison, a former BB&T CEO, may step in to fill one of the roles. Last week, Allison said that if he had a “magic wand” he would get rid of the Fed, but he knows that wouldn’t happen in his lifetime.

As the personnel shuffle occurs, some Republican lawmakers have been seeking to limit the Fed’s independence. In 2015, the House passed the Fed Oversight Reform and Modernization (FORM) Act, which would require the FOMC to make policy rate decisions according to a known standard; make all FOMC meetings recorded with a transcript made public-current custom is release after five years; and would subject the Board of Governors and the Fed banks to an annual audit by the Government Accountability Office (GAO). Any legislation, like the FORM Act, would require a Senate supermajority of 60 votes, which means that there could be some negotiation or compromise to win over some Democrats. But there is no doubt that the Trump Administration is about to change the composition of the Fed – and potentially shift monetary policy significantly.