Since the Great Recession, market participants have had to hang on to every word coming out of the Fed and its governors. Central bankers became the driving force behind the bull market. It is no surprise that we have written far too many blog posts on Central Banks and their influence. Thankfully since May 2016, we haven't written anything on the Fed because they were essentially on hold. Furthermore, the economy has been gaining momentum and fundamentals are now the driving force behind the stock market hitting new highs.
Vacancies opening quickly
Unfortunately, that doesn't mean that we can forget about the Fed and it is likely to undergo massive change over the next year. Already 3 Fed governors have resigned in recent weeks. On Friday, Daniel Tarullo announced his upcoming departure despite having 14 more years left on his term. Tarullo played a key role in bank supervision and was a strong supporter of Dodd-Frank and tough capital requirements for the largest banking companies. His exit comes as no surprise as the new administration is looking to weaken and perhaps gut Dodd-Frank.
In addition, Fed Chair Janet Yellen's term is set to expire in less than a year in 2018. During the election campaign, Trump openly criticized the Fed and proposed replacing Yellen and advocating congressional oversight and auditing the Fed. This likely means that we will see a new Fed Chair in 2018 and typically when the Fed Chair steps down so does the Vice Chair (Stanley Fischer).
Shift away from academics?
President Trump could appoint at least 5 new faces (out of 7 governor slots) to the Fed in short order. What this means isn't exactly clear. In the past, the Fed has largely been filled by academic economists with little real world business experience. Given Trump's track record so far, it would be shocking to see him follow that precedent and he would likely favor business people over academia.
Strategist Mark Grant says that “The Fed of today is not going to be the Fed of tomorrow.”
Grant, who accurately predicted the Brexit vote and Trump's victory, said the president and Treasury Secretary Steven Mnuchin will take advantage of filling key vacancies on the Fed board to further their agenda. Grant believes that given the administration's plan for infrastructure and military spend that the Fed will keep interests rates low to fund the trillions in new spending.
However, the economy may force the Fed to be more hawkish than dovish. With GDP growth accelerating as well as inflation picking up, Yellen may be forced to raise interest rates more aggressively.