Tags: fed | economy | fix | yellen | trump

More of the Same Won't Fix the Fed or the Economy

More of the Same Won't Fix the Fed or the Economy
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By    |   Monday, 09 October 2017 01:47 PM

Federal Reserve Chairwoman Janet Yellen’s four-year term will end of February 3, 2018, and as we have seen in the media, there is no love lost between President Trump and Yellen.

Candidate Trump was critical of the Fed, it’s low interest rate policy and toward the end of the campaign he “probably wouldn’t nominate Ms. Yellen to continue as Fed chief after her term expires in early 2018.”

This, of course, has led to speculation over potential candidates to take the reins of the Federal Reserve in 2018 and what that could mean for the monetary policy as the Fed embarks on unwinding its balance sheet and aims to boost interest rates four more times before the end of 2018.

While many Americans may not be familiar with the Fed or how its monetary policy shapes the domestic economy, they should aware of the historical correlation that shows the Fed has a good track record of boosting interest rates as it is heading into a recession.

Exiting September President Trump ramped up his search for the next chairperson with candidates including sitting chief Janet Yellen, Fed governor Jerome Powell, and former Fed governor Kevin Warsh as well as Stanford University economist John Taylor and John Allison, the former BB&T Bank chief executive.

On September 29th, it was reported that Trump intended to make a decision “over the next two or three weeks.” It’s also worth noting that Trump has an opportunity to makeover the leadership of the Fed as he fills four vacancies to be had on the seven-member board. It’s worth noting that every president since Ronald Reagan has kept the incumbent Fed chief on at the start of his presidency.

In reviewing the potential list of candidates, one of the biggest criticisms against Yellen is the employed policies spurred the economy along at just over 2% growth over her term. This wasn’t too far off the 2.1% average GDP growth registered during the last four years of her predecessor Ben Bernanke. Looking back over Bernanke’s term that began in February 2006 and ended in during that same month in 2014, the utilized policies delivered a U.S. economy that could not break past 2.7% growth over his 8-year term.

After 12 years of anemic growth that has led to ballooning credit card and student debt as well as tepid wage growth and a shrinking tax base, perhaps alongside the “draining of the swamp” in Washington other changes need to be made as well. Looking at the Fed’s latest economic forecast that calls for GDP to range between 2.0%-2.1% in 2018-2019 after hitting 2.4% this year, it seems that even the Fed doesn’t expect its policies to drive additional economic growth.

When a company’s strategy hits a wall and the tools it has used to drive its business are no longer working, it can double down with the exiting management team or sensing a need for change the Board of Directors will bring in new leadership and tactics in the form of new leadership get the company back on track. The Board of Directors is charged with acting in the best interest of the shareholders, and given the president is charged with nominating the next Fed chair he too should act in the best interest of shareholders, which in this case are the American people.

While a steady hand would be needed to steer the Fed through the unwinding of its balance sheet, new leadership could re-think the Fed’s tool box especially as the current business cycle becomes even longer in the tooth. In this case more of the same is not likely what the U.S. economy needs.

This translates into a likely change in the Fed chief and by extension naming one isn’t an extension of Yellen’s policies and tendencies, which likely means excluding Powell, who has not been viewed as a forward-thinking member of the Fed’s board, as well.

As Albert Einstein said, “"We can't solve problems by using the same kind of thinking we used when we created them."

Christopher (Chris) Versace is the Chief Investment Officer at Tematica Research, editor of the newsletter Tematica Investing, co-host of the Cocktail Investing Podcast and is a featured columnist to The Street.com as well as a contributor to Business Insider and Forbes.com

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As Albert Einstein said, “"We can't solve problems by using the same kind of thinking we used when we created them."
fed, economy, fix, yellen, trump
Monday, 09 October 2017 01:47 PM
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