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Trump, Fed May Actually Agree on Fewer Community-Banking Rules

Trump, Fed May Actually Agree on Fewer Community-Banking Rules

By    |   Thursday, 05 October 2017 04:52 PM

The speculation on who will fill the role of Chair of the Federal Reserve has been ramped up with a shortlist, apparently being prepared for President Trump. The fact that there is a shortlist is helpful as it suggests that the appointment will not be a random gut instinct pick on the part of the President.

So, let’s take a quick look at the names on the shortlist that are:

- Fed Chair Yellen, Democrat, whose reappointment still seems, at least to me, unlikely because her unabated support for increased regulation after the financial crisis. A reappointment of Yellen would of course signal a status quo and could, in terms of market pricing, mean a slight dollar and fed funds rate path because Ms. Yellen’s is generally considered as being super-dovish, which is not always fair to her.

It is also worth remembering that although it is likely that Fed Chair Yellen would resign as a Federal Reserve Governor if not reappointed, there is no necessity at all to resign as Fed Governor.

In case, Ms. Yellen would remain in office as Governor, President Trump would have to use one of the 4 vacancies to nominate the new Fed Chair.

The Senate does have to confirm the appointment as well.

- Kevin Warsh, Republican, who was Fed governor from 2006 to 2011 and who was also a former Morgan Stanley executive. During his period as Fed Governor, Mr. Warsh was on the hawkish side of the Federal Open Market Committee (FOMC). Earlier this year Mr. Warsh suggested lowering the Fed’s inflation target to a band between 1 percent and 2 percent, which is down from the existing 2 percent target. This is important for investors because under an inflation target band between 1 percent and 2 percent, the Fed would have to raise interest rates faster (!) than with the current target of 2 percent. He apparently has also reservations about the Fed’s asset purchases (QE) and the financial regulation. As a result, he would very likely support the continued roll-off of the Fed’s balance sheet. He has endorsed President Trump’s goal of at least 3 percent annual economic growth, through tax cuts, fewer regulations on businesses and lower government spending.

- Jerome Powell, Republican, who is Fed Governor since May 2002 and is considered as a full ally of the Fed Chair on monetary policy and therefore should be considered as a continuity of the actual policy. Powell is also somewhat skeptical on relying too much on mathematical rules such as the Taylor Rule for guiding monetary policy. Mr. Powell supports easing some of the bank rules that were put in place after the financial crisis, which is of course a standpoint that isn’t in contradiction with the President’s view on the matter. He also would prefer to soften the Volcker Rule on proprietary trading.

Other candidates on the shortlist are:

- John Taylor of Stanford University,

- Glenn Hubbard of Columbia University,

- Bancorp chairman Richard Davis,

- White House economic adviser Gary Cohn notwithstanding he criticized Trump’s handling of the Charlottesville incident.

Now, and in the context of all this, and while not being that much in the spotlight, Fed Chair Yellen gave yesterday “prepared” welcoming remarks at a community banking event.

Community banking doesn’t really lend itself to strong policy signals.

Ms. Yellen didn’t surprise on that and in fact we already got a pretty clear sign of the Chair’s thinking in her speech last week on “Inflation, Uncertainty, and Monetary Policy.”.

Nevertheless, and in the context that President Trump wants less regulation, Ms. Yellen stated: "For community banks, which by and large avoided the risky business practices that contributed to the financial crisis, we have been focused on making sure that much-needed improvements to regulation and supervision since the crisis are appropriate and not unduly burdensome … The Fed has an abiding commitment to consider how our decisions affect institutions and the customers they serve.”

It’s a fact that Fed officials frequently defend the regulatory overhaul put in place after the financial crisis as essential to protecting against future meltdowns, though Ms. Yellen and her colleagues often say requirements on community banks could be eased.

That openness to some change is taking on renewed relevance as U.S. President Donald Trump pushes to reduce business regulations.

Besides that, the President’s nominee as Fed vice-chair for supervision and regulation, Randal Quarles, is going through Senate confirmation and could be approved as soon as today.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Community banking doesn’t really lend itself to strong policy signals.
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Thursday, 05 October 2017 04:52 PM
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