Dr. Brian Jacobsen addresses new FOMC leadership and what that might mean for Fed policy.

 

Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. There’s change afoot at the Fed. We’ll spend the next two weeks talking about what that means in terms of a new composition of FOMC leadership and what investors might expect from the markets. This week: The leadership. Here with perspective is Dr. Brian Jacobsen, Senior Investment Strategist with the Wells Fargo Asset Management Multi Asset Solutions Team. Welcome.

Brian Jacobsen: Thanks for having me.

Laurie: We encourage our audience to visit our AdvantageVoice® blog—specifically the November 2 post. Brian compiled four fascinating charts comparing the economic trajectories of the previous four Fed chairs. But today, Brian, with Jerome Powell tapped to be the next Federal Reserve Chair, let’s start with what you think he brings to the table.

Brian: Many people believed that Powell really represented, perhaps, what could be referred to as “the continuity candidate” for [Fed] Chair.

Powell is probably, of the possible candidates, the most aligned with Chair Yellen’s gradual approach to normalizing interest rates. And where he differentiates himself a little bit is his view of regulation.

Laurie: Can you help our audience—just talk a little bit about the FOMC and what we might see coming forward?

Brian: The Federal Reserve is going under significant changes over the next year. Typically, there are supposed to be seven people on the Federal Reserve Board, but there’s actually three vacancies—and there has been for quite a while. So, Chair Yellen—she’s not just the Chair, but she’s also a board member. And while her term as Chair expires in February of 2018, her term as a board member doesn’t expire until 2024. But she might choose to resign her position on the board, meaning that there would then be four vacancies. So there would be only three board members.

So, why that is important is because of the Federal Open Market Committee, the FOMC—and that’s the monetary policy setting portion of the Federal Reserve System. That consists, typically, of 12 members. You have the seven board members and then you have five members from the Fderal Reserve Banks. Of those five, one is always the president of the New York Federal Reserve. And just this week, it was announced that the president of the New York Fed, Bill Dudley, was going to be taking early retirement in the middle of 2018. So, you have a lot of change that’s going to be taking place with the FOMC. Possibly five members will be changing.

So there could be some significant changes depending upon who it is that ends up filling those vacancies.

Laurie: And President Trump, he would be nominating four of those to be confirmed, and the New York Fed decides the president there.

Brian: That’s correct. President Trump can kind of influence who might be sitting on the New York Fed, but it’s a very indirect influence. Where he has direct influence is with the Federal Reserve Board itself.

Laurie: So there are these three vacancies on the Board of Governors. Why haven’t they been filled already?

Brian: Oh yes, that’s a good question. So they’ve been there for a while, and part of it is the gridlock that we have seen in Washington D.C. over the last few years. Part of it is on the President to nominate somebody to fill the position, and then it’s on the Senate to confirm those nominations—because these are positions that are often times on the advice and consent of the Senate. So, it takes two to tango.

But I think it is somewhat symbolic of the gridlock that still pervades Washington D.C.

Laurie: So with these changes afoot, what might this mean for policy, say, in 2018 versus what we’ve seen in 2017?

Brian: Based on the candidates who were kind of, allegedly, auditioning to be the chair, if, let’s say, President Trump decided to say, instead of, “You’re fired,” he said, “You’re hired,” to all those candidates to fill out the vacancies  on the Federal Reserve Board, in my opinion, I think it would be a marginally more hawkish FOMC. So we could see maybe a pickup in the pace at which the Fed attempts to normalize interest rates. So, if it’s a little bit more hawkish, that’s kind of important from an asset allocation perspective.

Laurie: Well Brian, let’s wrap this conversation up for this week, and next week, let’s talk about what to expect from the markets and the multi asset approach to navigating them.

Brian: Sure.

Laurie: But for now, thanks very much.

Brian: Thanks so much for having me.

Laurie: Until next time, I’m Laurie King; take care.

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