OK, I admit it. I am being very premature and extraordinarily presumptuous. But let me put it out there:
The likelihood that Janet Yellen will be renominated by President Trump as U.S. Federal Reserve (Fed) Chair just went down a tad, increasing the chances that former Goldman Sachs executive Gary Cohn, who is now Director of the President’s National Economic Council, will be nominated to replace Yellen in February 2018 when her term expires.
I know – a lot can change. But part of my job is to make forecasts given the incoming data, and, in my view, it is looking more likely that we will see regime change at the Fed.
Yellen vs. Trump on Financial Regulations
While the markets were expecting more color on the economy and monetary policy from Yellen when she spoke last week at the Fed’s annual conference in Jackson Hole, Wyoming, what she delivered instead was-a full throated defense of the regulatory regime that was put in-place in the aftermath of the 2008 financial crisis.
We can debate whether the regulatory regime has been good or not. What we cannot debate is the Trump Administration’s dislike for the regime and their stated desire to change it. Ergo, the higher likelihood of regime change at the Fed.
Whether that potential regime change in 2018 is a positive for the markets, for now, is an open question. Given the Trump Administration’s proclivity to go for practitioners and not hawkish, rules-based academicians, the bet has to be on Cohn and for the policy regime of accommodative monetary policy to continue despite a new Fed Chair. Further, the possibility of even looser monetary policy would be higher with Cohn than with Yellen.
Fed, ECB Dodge on Policy Direction
On the policy front, however, Jackson Hole did nothing to change the dialogue. Both Yellen and European Central Bank (ECB) President Mario Draghi, who also spoke at last week’s Fed gathering, dodged the issue and did not provide any further clarification with respect to policy direction.
To me, that implies they are both reasonably happy with the policy framework the markets are discounting at the moment, at least for the rest of 2017. That is, Yellen is comfortable with the market’s expectation of a balance-sheet action at the Fed’s September policy meeting and the expectation that a December rate move is on the table but far from certain. Similarly Draghi is also comfortable with the market notion that a significant change in the policy framework is not in the cards. That said, if the euro continues to strengthen, that could change, as they have already indicated.
At Jackson Hole, the only central banker who provided meaningful new insight, in my view, was Bank of Japan (BOJ) Governor Haruhiko Kuroda. In an interview, Kuroda reasserted that the growth spurt in Japan is unlikely to sustain itself and the Japanese economy needs continuous monetary support, which he is happy to continue providing with Japan’s yield curve-management program already in place.
Fed Tightening to Continue – For Now
The bottom line is that the current environment of ever-so-modest Fed policy tightening will continue for now, but the possibility of that changing to a more accommodative policy down the road is increasing slightly. Both the ECB and BOJ also are likely to continue to provide substantial monetary support to their respective economies.
That, in my view, remains a supportive environment for risky assets – even if we do see a new Fed chair in 2018 – despite a lot of market participants’ consternation with respect to valuations.
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These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.