November 18, 2016


Trump's Monetary Conundrum  (Nouriel Roubini, NOV 18, 2016, Project Syndicate)

Even if Trump does choose a hawk to replace Yellen, his appointee would be only primus inter pares on the Federal Open Market Committee. Yellen's successor would not be able simply to impose his or her view on the FOMC's seven-member Board of Governors and five Reserve Bank presidents.

While the Fed did resemble an absolute monarchy under former Chairman Alan Greenspan, it became more of a constitutional monarchy under Greenspan's successor, Ben Bernanke. Under Yellen, it might best be described as a democratic republic. This transformation cannot be reversed: each FOMC member holds strong views about which direction monetary policy should take, and each is willing to dissent when needed.

This means that a radical hawk appointed by Trump could end up in the minority, and would be consistently outvoted by the FOMC's dovish majority. Of course, Trump may be able to change the Fed Board's composition over time, by appointing new governors when Stanley Fischer, Lael Brainard, Daniel K. Tarullo, and Jerome H. Powell's terms end. But if he takes this route, the market will still police the Fed's actions. If continued low growth and low inflation do not justify rapid interest-rate increases, a hawkish Fed that raises rates anyway will face harsh disciplining by the market - and, by extension, so will Trump.

Moreover, premature and excessive hawkishness would strengthen the US dollar and sharply increase the US trade deficit, undermining Trump's stated goal of creating jobs and boosting incomes for his blue-collar, working-class electoral base. If Trump cares about his base - or if he at least wants to avoid a political backlash from it - he should appoint dovish Fed governors who will favor easy-money policies that weaken the dollar. Ironically, President Barack Obama's appointees, such as Brainard and Tarullo, are actually ideal for Trump's agenda.

To believe that you can weaken the dollar requires ignoring the rest of the world.

Posted by at November 18, 2016 8:52 AM