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Trump on Fed chair: Status quo vs radical shift
October 30, 2017, 12:05 pm

Markets are speculating that Trump will choose a Fed chief who will not upset the current policies of the Federal Reserve [Xinhua]

Emerging markets are hoping that US President Donald Trump will pick a replacement for Federal Reserve chief Janet Yellen, whose term as chair expires in February 2018.

While she will remain on as Fed governor until 2024, and will be one of five candidates for Trump to choose from, economists in emergint markets are betting that Trump could sway toward Fed Governor Jerome Powell, who is seen as being more dovish than Yellen.

Yellen took over the helm at a critical time in recent economic history, just as the Federal Reserve was moving to end its quantitative easing policy in 2014.

Quantitative, or monetary, easing is a mechanism used by central banks to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy. Between 2008 and 2015, US interest rates were at or around zero.

In this case, the Fed flooded financial institutions with capital through successive bond-buying programs to the tune of $85 billion to alleviate the impact of the sub-prime mortgage crisis, which created financial chaos around the world in 2008.

In 2014, however, the Fed started to taper off its bond-buying program in $10 billion increments until the program was terminated. The Fed then began deliberating on raising interest rates.

The period between 2008 and 2014 marked a boom in emerging market investments as investors saw a great buy in India, China, Turkey, Brazil, Nigeria and Turkey, to name a few.

But with US interest rates rising since late 2014 – the overnight lending rate now stands between 1.0 and 1.25 per cent – investors were lured back to American markets, leaving commodity trading in emerging markets at drastic low levels.

Some countries, such as South Africa, went into technical recession.

While most emerging markets, chiefly BRICS nations, have accommodated their economic policies for US rate hikes, others are hoping to delay such moves for as long as possible.

The prospect of Jerome Powell taking over from Yellen will likely send emerging markets into new highs in late 2017 and early 2018 as he is seen as being more cautionary on interest rate hikes.

Powell has voiced his opinions that it may be time to slowly roll back some of the policies – without rocking the boat – which Yellen green-lighted in a bid to get the US economy back on track.

Institutional reform?

Although Yellen herself is still a likely choice, Trump could also sway in favor of John B. Taylor who has opposed much of what the Fed has done in the past decade and would probably implement a structural overhaul of the institution.

Taylor, in stark contrast to Powell, has been a fierce opponent of quantitative easing and the bond-buying regimen predicting that it would only cause eventual inflation rate hikes.

Whether Trump sticks with Yellen or chooses Powell, it is unlikely that policy will change much in the interim. One of the benchmarks that Trump has used as an example of his White House success has been the stock market surge in recent months, with the Dow Jones, for example, continuing to break records.

Still, Trump has said he wants to revisit key economic regulations.

Yellen has previously warned Trump not to “roll back the clock” and also said that the “economy that is operating reasonably close to maximum employment with inflation heading back to 2 percent”.

The Fed in recent meetings maintained that it was seeing continued inflation rate growth toward its two per cent target and said that job gains were solid in 2017 – growing at an average monthly rate of 180,000 additional jobs.

The Fed also believes that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace”.

The unemployment rate has been significantly cut in recent years falling to 4.2 per cent.

By Firas Al-Atraqchi for The BRICS Post

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