Watch Live: Senate Banking Committee "Grills" Trump"s Fed Chair Nominee Jerome Powell

Update (11:45 am ET): As Powell"s testimony draws to a close, analysts at Stone & McCarthy noted that - as expected - the future Fed chair"s comments were "generally dovish".

The hearing was largely free of surprises. As it neared its close, Powell offered his thoughts about the blockchain and digital currencies (one day they could impact the Fed"s policies, but right now they"re too small to matter), and the mysterious roots of low inflation (the Fed is still struggling to determine if it"s due to transitory factors, or some kind of fundamental shift.

Here"s Stone & McCarthy:

• In his confirmation hearing before the Senate Banking Committee, Powell fielded questions mainly on the topics of raising interest rates, shrinking the balance sheet, and his views on "tailoring" regulation.


• Powell maintained the view that it is appropriate to gradually increase short-term rates against a backdrop of healthy, consistent growth with a strong labor market. He did not address inflation issues.


• He said GDP growth should be about 2.5% in 2017, and looking forward to "something pretty close to that" next year.


• Powell declined to specifically say if he would vote for another rate hike at the December 12-13 FOMC meeting. He did say "conditions are supportive" for another rate hike and "the case for raising rates at the next meeting is coming together".


• He anticipated that balance sheet normalization will proceed "passively and gradually", and that in "about 3 or 4 years" that the balance sheet will decline to a "new normal" of about $2.5 trillion-$2.9 trillion. He said no one can be certain about the exact size at the end. He also said the Fed wants the balance sheet to be composed mainly of Treasurys.


• "I do" oppose auditing of monetary policy decisions. He reiterated that an independent central bank helps ensure better outcomes for the economy. He said there has been "nothing" in his conversation with the Administration to give him any concern about political interference.


• He declined to answer questions regarding the tax reform bill, he said broadly "the debt needs to be on a sustainable path", but "not our role" to comment on fiscal policy.


• He supported "tailoring" of regulation and supervision to put the "most intense and stringent" regulation on the largest institutions and scaling down for smaller banks. "We are taking a fresh look at this now." He said he and Vice Chair for Supervision Quarles are in agreement on most points.


• There are currently three vacancies on the Board for the terms ending January 31, 2020; January 31, 2022; and January 31, 2030. There will be a fourth when Yellen retires from the Board for her term as Governor that ends January 31, 2024. By law, one of these seats will go to a community banker.


• The office of the Vice Chair of the Federal Reserve is currently vacant. The White House has not named a candidate as yet. The position of Vice Chair for Supervision was filled by Randal Quarles as of October 15.

* * *

Update (11:00 am ET): So far, Powell’s testimony before the Senate Banking committee has been a snooze-fest. However, Powell offered what many view as a telling clue about how his approach to banking regulations might differ from his predecessor’s.

In response to a question by Republican Sen. John Kennedy of Louisiana, Powell said that he doesn’t believe there are any more “too big to fail” banks in the US.

The question came after Kennedy admonished Powell to fight harder for community banks, after accusing him of trying to "regulate them half to death.”

In previous remarks, Fed Chairwoman Janet Yellen said her assessment of the country’s financial institutions, and the industry as a whole, is that the US has “a safer” banking system now than it did leading up to the crisis. Because of that, she said the Fed planned to eliminate certain burdens on smaller regional banks.

Powell’s remark suggests he might be open to loosening the burdens on larger banks as well.

Here’s more from WSJ:

Sen. John Kennedy (R., La.) put Mr. Powell in an awkward position with a question about whether big U.S. banks are still “too big to fail.”

 

The only way to know the answer for sure is for one of those banks to actually fail, without a taxpayer bailout. That hasn"t happened since the last bailouts in 2008.

 

Mr. Powell first gave the stock answer for regulatory officials: “We’ve made a great deal of progress on that,” he said, citing regulations adopted after the financial crisis. Pressed further, Mr. Powell did something regulators rarely do:

 

He answered the question directly.

 

“I would say no,” he said.

Powell also revealed his expectations for GDP growth, saying he expects 2.5% growth this year, and around that level next year thanks to accomodative financial conditions and a strong stock maret. He added that the case for a December rate hike is "coming together," though he declined to give a "specific answer" about whether the bank would hike.

"We need to go ahead and have the meeting to listen to each other."

* * *

Just two weeks after President Donald Trump announced that Fed Governor Jerome “Jay” Powell would be his pick to succeed Janet Yellen as chairman of the Federal Reserve, he is appearing today before the Senate Banking committee in a confirmation hearing that’s viewed as a virtual certainty.

The hearing begins at 10 am ET. Watch it live below:

However, while Powell’s chances of approval are high – given that he’s been twice confirmed as a Fed governor - Business Insider’s Pedro Da Costa points out that Powell – a former private equity executive - has commented fairly sparsely on monetary policy and regulatory matters despite serving as a Fed governor since 2012, so there are lots of unanswered questions about his views. As Reuters points out, Powell - once one of the FOMC"s more hawkish members, has recently moderated his position to more closely resemble Yellen"s dovish approach.

Also, Powell"s record isn"t without blemish: In the past, however, Powell has been more cautious about the risks posed by such an expansive approach. In his first months at the Fed, Powell was among those who pressured then chair Ben Bernanke for more clarity on when the central bank would start scaling back its bond buying. When Bernanke made those plans public it triggered a “taper tantrum” spike in market interest rates in the summer of 2013, forcing Bernanke, Powell and others to do damage control.

This could precipitate a lively Q&A session as senators try to get to the heart of exactly what they can expect from the reticent central banker.

According to media reports and analysts’ assessments, Trump’s logic in choosing Powell (over both Kevin Warsh, John Taylor and Powell’s current boss, Janet Yellen) is that, being a lifelong Republican, Powell has a slightly more permissive stance on regulation than Yellen. However, he also shares Yellen’s dovish tendencies, and it’s widely believed that interest rates and the Fed’s balance-sheet unwind will proceed cautiously under his leadership.

During the hearing, da Costa posits that Powell faces two principal tasks: Flesh out his views on monetary policy, regulation and how they differ from those of his predecessor.

Here are a couple hypothetical questions that, if da Costa were a senator, he would ask:

1. Do you intend to continue raising interest rates in December and next year despite below-target inflation, and what factors are you considering in making that decision?

Part of Powell’s early mission on this front will be establishing himself as a leader and developing his own way of communicating on major policy issues, many of which he has touched upon only sparsely as a Fed governor.

 

Powell should be pressed on his lack of economics training - he’s the first Fed chair in decades to lack a doctorate in the field - and how he will use his staff and the expertise of his colleagues to help guide decision making.

 

Powell is expected to maintain the more committee-centered approach that began under Ben Bernanke, who wanted to move away from Alan Greenspan’s cult of personality, and continued under Yellen.

 

The Fed has raised interest rates four times since December 2015, to the current 1% to 1.25% range. The central bank has also started to gradually shrink a $4.5 trillion balance sheet that expanded sharply in response to the Great Recession of 2007-2009.

2. What is your view of the post-crisis financial rules and how willing would you be to roll them back, in particular capital requirements for big banks and consumer protections now under challenge?
 

Many investors and public advocates worry that weaker rules could lead banks to again take wild risks and put consumers and workers at undue risk. Powell, a former Carlyle Group executive, has plenty of financial market experience, but some might worry he is ideologically too close to the sector to supervise it closely.

 

Both Yellen and the recently-retired vice chair, Stanley Fischer, have spoken in unusually blunt terms about the dangers of rolling back financial rules.  

 

Powell has been friendly to the idea of letting financial institutions roam more freely, albeit within limits, according to The New York Times. Indeed, Powell"s industry-friendly stance probably didn"t hurt his chances of landing the job.

 

A political squabble that started last week over the leadership of the Consumer Financial Protection Bureau is just a small taste of all the political blowback that is likely to ensue from Republican efforts to undo post-crisis financial regulations. These include much higher capital requirements for the largest Wall Street institutions, because these are the ones that brought the financial system to the brink of failure in 2008.

 

Another big regulatory issue facing the Fed is how to regulate so-called “shadow banks,” which range from hedge funds to private equity to the money market industry — essentially firms without a banking charter that perform banking-like functions.

 

Before the financial crisis, investment banks were part of the shadow banking world, and the lack of regulatory scrutiny on their activities was a major culprit of the crisis.

 

Given the massive and lingering costs of that debacle in the form of lost jobs, wealth and productivity, Americans should hope Powell places the burden of proof on the need for any rule rollbacks on the industry, and even then, assesses their assertions with a giant grain of salt.

In his prepared remarks – released last night - Powell said he expected the central bank to continue raising its benchmark interest rate and trimming its balance sheet under his leadership, but had some pointed comments over deregulation, economic stability, and the plunge protection team...

Chairman Crapo, Ranking Member Brown, and other members of the Committee, thank you for expeditiously scheduling this hearing and providing me the opportunity to appear before you today. I would also like to express my gratitude to President Trump for the confidence he has shown by nominating me to serve as Chairman of the Board of Governors of the Federal Reserve System. The Federal Reserve has had a productive relationship with this Committee over the years, and, if you and your colleagues see fit to confirm me, I look forward to working closely with you in the years ahead.

 

Before I continue, I would like to introduce my wife, Elissa, who is sitting behind me. I would not be here today without her unstinting love, support, and wise counsel.

 

As you know, I have served as a member of the Board of Governors and the Federal Open Market Committee (FOMC) for more than five years, contributing in a variety of capacities, including most recently as chairman of the Board"s Committee on Supervision and Regulation. My views on a wide range of monetary policy and regulatory issues are on the public record in speeches and testimonies during my service at the Fed. The Congress established the Federal Reserve more than a century ago to provide a safer and more flexible monetary and financial system. And, almost exactly 40 years ago, it assigned us monetary policy goals: maximum employment, meaning people who want to work either have a job or are likely to find one fairly quickly; and price stability, meaning inflation is low and stable enough that it need not figure into households" and businesses" economic decisions.

 

I have had the great privilege of serving under Chairman Bernanke and Chair Yellen, and, like them, I will do everything in my power to achieve those goals while preserving the Federal Reserve"s independent and nonpartisan status that is so vital to their pursuit. In our democracy, transparency and accountability must accompany that independence. We are transparent and accountable in many ways. Among them, we affirm our numerical inflation objective annually and publish our economic and interest rate projections quarterly. And, since 2011, the Chairman has conducted regular news conferences to explain the FOMC"s thinking. Additionally, we are accountable to the people"s representatives through twice-a-year reports, testimony, oversight, and audited financial statements. I am strongly committed to that framework of transparency and accountability and to continuing to look for ways to enhance it. In our federated system, members of the Washington-based Board of Governors participate in FOMC deliberations with the presidents of the 12 regional Federal Reserve Banks, which are deeply rooted in their local communities. I am a strong supporter of this institutional structure, which helps ensure a diversity of perspectives on monetary policy and helps sustain the public"s support for the Federal Reserve as an institution.

 

If confirmed, I would strive, along with my colleagues, to support the economy"s continued progress toward full recovery. Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target. We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink. However, while we endeavor to make the path of policy as predictable as possible, the future cannot be known with certainty.

 

So we must retain the flexibility to adjust our policies in response to economic developments. Above all, even as we draw on the lessons of the past, we must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation"s financial stability and economic prosperity--the original motivation for the Federal Reserve"s founding.

 

As a regulator and supervisor of banking institutions, in collaboration with other federal and state agencies, we must help ensure that our financial system remains both stable and efficient. Our financial system is without doubt far stronger and more resilient than it was a decade ago. Our banks have much higher levels of capital and liquid assets, are more aware of the risks they run, and are better able to manage those risks. Even as we have worked to implement improvements, we also have sought to tailor regulation and supervision to the size and risk profile of banks, particularly community institutions. We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms - strong levels of capital and liquidity, stress testing, and resolution planning - so that banks can provide the credit to families and businesses necessary to sustain a prosperous economy. In doing so, we must be clear and transparent about the principles that are driving our decisions and about the expectations we have for the institutions we regulate.

 

To conclude, inside the Federal Reserve, we understand that our decisions in all these areas matter for American families and communities. I am committed to making decisions objectively and based on the best available evidence. In doing so, I would be guided solely by our mandate from the Congress and the long-run interests of the American public.

 

Thank you. I would be happy to respond to your questions.

The hearing is expected to last until noon ET.
 

NY Fed President Bill Dudley Retiring

The Federal Reserve"s "smooth transition" from Janet Yellen to Jay Powell is set for a major speedbump.

Just two short days after Donald Trump confirmed what weekly trial balloons had reported for weeks, namely that Janet Yellen is being replaced with most "dovish" alternative possible in the face of former Carlyle partner and 5 year Fed governor Jerome Powell, the person who according to some is even more instrumental to Fed policy than Janet Yellen, NY Fed president Bill Dudley is reportedly leaving.

Late on Saturday evening, CNBC"s Steve Liesman reported that Fed vice chairman Bill Dudley, a former Goldman managing director and chief economist, not to mention a key figure in "the unprecedented government response to the financial crisis", is set to join Janet Yellen among the ranks of the unemployed (if only until he hits the speaking circuit and writes a book explaining that the Fed is the cause of the world"s problems) and announce his retirement as soon as next week. 

Dudley, who has has headed the bank since 2009, will likely retire sometime in the spring or summer of 2018 when his replacement is found and approved, sources told CNBC. His term ends in January 2019. A search committee has already been formed.

According to Liesman, Dudley told several colleagues he was planning to leave in 2018, "and his departure is said not to be related to the decision last week by President Donald Trump to name Fed Governor Jerome Powell as the next Fed Chairman." Which probably means that Dudley"s departure is precisely that: a protest against Trump"s removal of Yellen with whom Dudley had a pristine relationship.

Dudley, set to turn 65 next year, became NY Fed president in the immediate aftermath of the Great Financial Crisis and was instrumental in devising the Fed"s ZIRP and QE policies.

As president of the New York Fed, Dudley holds a special spot among the dozen regional bank presidents. The incumbent always serves as vice chairman of the rate-setting Federal Open Market Committee (FOMC) and always votes at policy meetings, while other regional presidents have a rotating vote. More importantly, before he became NY Fed president, Dudley headed the New York Fed"s markets group - also known elsewhere as "the plunge protection team" - which Liesman describes as "a critical job that oversees the trades and market operations required to set the Federal Funds Rate." Liesman is right.

In both positions, Dudley was a principal player in Fed decisions concerning the demise of Lehman Brothers, AIG and Bear Stearns, along with emergency measures taken by the central bank to stanch a meltdown in the financial system.

Dudley"s "list of accomplishments" is long: several trillion dollars long in fact. Under the former Goldman executive, the NY Fed was responsible for accumulating the trillions in assets the Fed purchased under QE, bringing its balance sheet up to $4.5 trillion. It is now responsible for the market operations underway to reduce the balance sheet.

Dudley"s departure comes at a time of dramatic change at the Fed. in addition to a new Fed Chairman, Vice Chairman Stan Fischer left his post in October, and there are currently three open seats on the seven-member Board of Governors. That number may rise to four if Yellen leaves the board when Powell is confirmed, and before others are nominated and confirmed by the Senate.

The choice of Dudley"s replacement will be made by the New York Fed"s Board of Directors and approved by the Federal Reserve Board. Dudley is expected to speak at the economic club of new York at noon on monday.

With Dudley"s departure, the Fed will lose one of its more prominent centrists as the following Dove-Hawk ranking from Barclays shows.

As for new Fed chair Jay Powell, while many already had a low opinion of him being able to keep the system together once the next crash happens, the departure of a key Fed veteran such as Bill Dudley will only make it that much more complicated to preserve stability in the not too distant future. Here are some scathing thoughts from Capital Economics on Powell"s tenure as next Fed chair:

Powell an underwhelming choice to be Fed Chair

• Some are born great, some achieve greatness and some have greatness thrust upon them. Jerome Powell belongs in the third category. President Donald Trump’s nomination of Powell to be the next Fed Chair is an underwhelming choice. The Fed will face many difficult challenges over the next few years and it is unclear whether Powell has the skills to navigate them.


• The polite thing to do would be to offer some platitudes about Powell being the ‘safe’ choice, who will provide continuity with the Yellen-led Fed’s monetary policy approach of gradually normalising interest rates and might be more inclined to loosen financial regulation. That said, although Powell is more open to deregulation than Yellen, he is hardly a free market zealot. He has expressed support for simplifying and “recalibrating” regulation, particularly the Volcker rule but, at the same time, he has warned that “it is essential that we protect the core elements of these reforms for our most systemic firms in capital and liquidity, stress testing and resolution”. At least financial markets will be comforted that Trump didn’t pick the potentially much more hawkish John Taylor or Kevin Warsh.


• Nevertheless, Powell’s resume is not up to the standards we would expect of a nominee for Fed Chair. For a start, unlike the last three Fed Chairs, he is a lawyer rather than an academically trained economist. His other experience is in investment banking and private equity. He also spent some time at the Bipartisan Policy Center and worked in the Treasury for a couple of years during the Bush Snr administration. None of those roles marked him out to be the next leader of the world’s most important central bank.


• Powell was only nominated to join the Fed’s Board of Governors in 2011 because then-President Barack Obama needed a token Republican to ease the accompanying nomination of Jeremy Stein through the Republican-controlled Senate. Since joining the Board, Powell has had little to say of any interest. His speeches have focused on regulatory issues and when he has spoken about monetary policy issues, he has been careful never to deviate from the in-house view. Not surprisingly, markets initially didn’t see Powell as a possible candidate to be Fed Chair.


• Admittedly, we could be wrong about Powell. He is still something of an enigma and he may emerge as a strong leader with a firm grasp of monetary and economic issues. His Senate nomination hearing in the coming months will provide the first insight into what type of Fed Chair he will be. Regardless of his performance at the hearing, however, we expect him to be confirmed without too much drama.


• There is an argument to be made that Powell’s market experience could prove to be crucial in the coming years. But there are potentially even bigger challenges ahead. As an institution, the Fed is grappling with the most fundamental question of what drives inflation in the modern US economy, as it seeks to explain why it has been unable to hit its 2% inflation target consistently. Should the Fed stick with the orthodox Phillips curve view that shrinking slack in the labour market and wider economy will eventually generate an acceleration in wage and price growth or abandon that framework? If the Fed does abandon it, what becomes the working model of inflation? Inflation expectations? Does inflation targeting even make any sense in a world where interest rates influence domestic activity and employment, but activity and employment don’t influence prices? Monetary targeting was abandoned because the old relationships with prices broke down. Inflation targeting isn’t sacrosanct. We would feel more comfortable if it was the academically outstanding economist Janet Yellen who was leading that research, particularly when she had the benefit of the strong intellect and experience of Vice Chair Stanley Fischer at her side.


• Powell’s nomination means that we still expect the Fed to raise interest rates once more this year and then four times next year. That is slightly more hawkish than the FOMC’s own projections imply, but those forecasts don’t appear to factor in a fiscal stimulus. Beyond that, a lot still depends on who Trump picks to fill the other vacancies on the Fed’s Board. With Powell’s promotion, there will be four vacancies, including the Vice Chair position. Otherwise, the risk of a serious policy mistake – in either direction – will arguably be higher under Powell’s leadership than under Yellen’s. And policy communications may become more muddled, if Powell doesn’t provide strong intellectual leadership and the policy debate descends into a free-for-all among regional Fed Presidents.

What Will Stocks Do Under A New Fed Chair?

Via LPLResearch.com,

President Trump is reportedly set to announce his selection for the next Chair of the Board of Governors of the Federal Reserve (Fed) in the very near future, with Jerome Powell emerging as the likely nominee.

Though he’s yet to make a final decision, reports suggest that a final decision will come before November 3.

In our latest Bond Market Perspectives, we took a dive into the potential shift in composition of Fed members in 2018, in addition to the chair, and why it could be quite hawkish—but what does new Fed leadership really mean?

Per Ryan Detrick, Senior Market Strategist, “Just as a new President brings uncertainty, a new Fed chair can do the same. In fact, going clear back to Charles Hamlin (the first Fed chair) in 1914 and his 14 successors, the Dow is down on average six months after a new chair.”

Keep in mind that the sample size is quite small and the results below are skewed due to WWI, the Great Depression, and the crash of 1987.

We’re not suggesting that a new Fed chair is likely to trigger a sharp selloff, but it would add to market uncertainty, and markets don’t like uncertainty.

So we wouldn’t be surprised if Trump’s announcement spurs a bout of volatility, but when we look at the bigger picture, we continue to see very few signs of the excesses seen at previous major market peaks. This suggests very low odds of a recession beginning over the next 12–18 months and a likely continuation of the equity bull market in 2018.

Trump Will Own The Next Fed But "All Their Models Are In Ruins"

Authored by James Rickards via The Daily Reckoning,

President Trump is expected to nominate the next Federal Reserve chair within a matter of days.

As I’ve explained before, Donald Trump has the opportunity to appoint a higher percentage of the Board of Governors of the Federal Reserve system at one time than any president since Woodrow Wilson.

President Wilson signed the Federal Reserve Act during the creation of the Fed in 1913 when they had a vacant board. At that time, the law said the secretary of the Treasury and the comptroller of the currency were automatically on the Fed’s board of governors. But besides that, President Wilson selected all of the other participating members.

Due to vacancies he inherited and key resignations, Trump now has the opportunity to fill more seats on the Fed’s Board of Governors than any president since then.

That’s pretty amazing when you think about it.

To review, the Federal Reserve’s Board of Governors is made up of seven appointees. That means that they can make a majority decision with four votes. If you’re reading about the Fed, you might also see reference to “regional reserve bank presidents.” These are roles within the Federal Reserve System, but the real power is found on seven-member Board of Governors.

Trump will own the Fed.

Meaning, whatever the president wants monetary policy to be, he’ll get. In other words, Donald Trump will be able to shape the Fed’s majority. But the tricky part is figuring out how he plans to shape it...

During the campaign season, Trump called China and other nations currency manipulators. That signaled he believed the dollar was too strong and wanted it to weaken. But then the North Korean nuclear crisis rose to the fore.

Trump backed off his threats against China because China has the most economic influence over North Korea, and Trump wanted China to use that leverage to convince the North to back off its nuclear program.

But China didn’t deliver as Trump had hoped, and a trade war with China is now likely. That’s especially true now. Chinese president Xi Jinping has solidified his hold on power after the Chinese Politburo re-appointed him yesterday. Xi had avoided rocking the boat in recent months while his position was uncertain. But now that his lock on power is secure, Xi can afford to be much more confrontational with Trump.

Trump’s trade policy has led many to believe that Trump will appoint a lot of “doves” to the Board. But don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations.

Trump advisers include hard-money advocates like Dr. Judy Shelton, David Malpass, Steve Moore and Larry Kudlow. I expect Trump to heed their advice.

Which brings us to Janet Yellen and the next Federal Reserve Chair…

Janet Yellen’s term as chair is up at the end of January - just over three months from now. Whoever President Trump appoints to replace her will be subject to Senate confirmation.

Because that process takes time, that means the president has to name Yellen’s successor around November or December.

And again, he’s expected to make that announcement by Nov. 3, before he heads to China.

The market is tightly focused on President Trump’s pick. As of now, betting markets had the approximate probabilities as follows:

Powell’s main qualification seems to be that he’s just like Yellen except he’s a Republican. So, if we combine their votes, that a 68% chance that policy will continue unchanged, which means more rate hikes ahead.

The next in line is John Taylor, who is considered the most hawkish of the group. If we add his votes to the Powell + Yellen pool, that an 85% probability that policy will either be the same or tighter.

No relief for gold in the Fed sweepstakes.

Now, as I’ve been saying for months, my money’s on Kevin Warsh. Warsh is the likely next chair of the Fed.

Warsh has previously served on the board. After being nominated by President George W. Bush he was a Fed governor where he served from 2006 until he resigned early in 2011.

Kevin Warsh is a pragmatist, not an ideologue like Yellen. He’s not beholden to obsolete Fed models like Phillips curve that says low unemployment means higher inflation. Warsh understands that disinflation is a serious problem for a country with a 105% debt-to-GDP ratio, like the U.S.

Warsh and the pragmatists understand that inflation is needed for the U.S. to have any hope of getting the debt problem under control.

Warsh believed that the Federal Reserve should have raised interest rates a long time ago. But with disinflation a much more pressing concern than inflation right now, being a pragmatist means he won’t commit to tightening if conditions don’t warrant it.

We’ll see how this all plays out probably late this week or early next before Trump leaves for China.

But it’s important to realize that institutions boil down to people. And there’s going to be a lot of turnover at the Fed under Trump. It’s not just limited to his choice of Fed chair.

Yes, Yellen will likely be out. But so are Fed officials that align with her, like Vice President Stanley Fischer, who announced his resignation in September.

As I indicated, the new, emerging Fed will have less faith in traditional models. For example, in September, Fed governor Lael Brainard delivered one of the most significant Fed speeches ever. Translating from Fed-speak to plain English, she more or less admitted the Fed has no idea how inflation works.

Brainard pointed out that the Fed began its current monetary policy tightening cycle in the belief that tight labor markets implied inflation was coming with a lag. The Fed raised rates in December 2015, December 2016, March 2017 and June 2017 in part to get out ahead of this coming inflation.

Instead the opposite happened.

The Fed’s favorite measure of inflation plunged from 1.9% to 1.3% between January and August 2017 even as job creation continued and the unemployment rate fell. In other words, the relationship between tight labor markets and inflation turned out to be the exact opposite of what the Fed believed.

Their models are in ruins.

Of course, this is what I’ve been telling my readers to expect all year. The Fed was tightening into weakness, not strength, and would soon have to flip back to ease in order to avoid an outright U.S. recession. And ease is exactly what Brainard called for in her speech.

In the meantime, a lot of uncertainty over the Fed’s direction will hover over the market, as if there wasn’t enough uncertainty in the market already.

But one thing is certain:

The next Fed head will have a lot on his (or her) plate.

The biggest winner will be gold. The time to enter your gold position, if you don’t already have one, is now.

Meet The 22 Economists That Want To Kill Your Purchasing Power

After the Fed failed to spark any notable increase in aggregate demand despite keeping interest rates at zero for seven years, a group of economists is pressuring the central bank to rethink one of its most closely held-policy parameters.

The group of 22 economists, which includes Nobel laureate Joseph Stiglitz and former Minneapolis Fed President Narayana Kocherlakota, delivered a letter to the Fed on Friday pressuring it to appoint a blue-ribbon commission to reevaluate its policy targets in a way that’s transparent and also involves officials with a diversity of viewpoints. Ultimately, the group hopes the central bank will reevaluate its inflation target, which has stood at just below 2% since 2012.

Borrowing the reasoning from a paper published by the San Francisco Fed earlier this year called “Monetary Policy in a Low R-Star World,” the group argued that structural shifts in the US economy appear to have shifted the real rate of interest permanently lower – and that the US economy can now tolerate higher inflation as a form of compensation.

Here"s a passage from the letter:

“Even if a 2 percent inflation target set an appropriate balance a decade ago, it is increasingly clear that the underlying changes in the economy would mean that, whatever the correct rate was then, it would be higher today. To ensure the future effectiveness of monetary policy in stabilizing the economy after negative shocks – specifically, to avoid the zero lower bound on the funds rate – this fall in the neutral rate may well need to be met with an increase in the long-run inflation target set by the Fed.”

Such a reassessment would be particularly appropriate now, the economists argue, because “the lack of evidence that moderately higher inflation would harm Americans’ standard of living is juxtaposed with the tremendous evidence that a tighter labor market would improve Americans’ standards of living.”

Some Fed officials have already expressed tentative support for raising the inflation target, or at least changing the system by which the central bank’s parameters are set.

Williams noted the need for the Fed “to adapt policy to changing economic circumstances” in his paper, and Boston Fed President Eric Rosengren has said that the Fed should adapt policy to changing circumstances. Vice Fed Chairman Stanley Fischer has praised the system adopted by the Bank of Canada, where policy targets are reviewed every five years, then re-set with the participation of the legislature.

The argument for why a central bank should aim to push consumer prices even higher might seem obtuse to some readers - so Kocherlakota explained his reasoning for signing the letter in a column published by Bloomberg.

Raising the inflation target would give the Fed more room to maneuver during the next slowdown by allowing it to focus on reining in inflation if benchmark rates are already low, Kocherlakota said. “If, for example, people expect inflation to be 3 percent, then a zero nominal rate translates into a negative 3 percent real rate -- a full percentage point lower than the Fed could achieve if expected inflation were 2 percent.”

Experience suggests the Fed could use the support. During the most recent period of near-zero interest rates, the U.S. unemployment rate remained above 5 percent for nearly seven and a half years. And Yellen has suggested that, if another recession takes the Fed to the zero lower bound, the unemployment rate might stay above 5 percent for close to five years.

But while the Bureau of Labor Statistic’s seasonally adjusted CPI slumped to a 19-month low in April, other measures, like a gauge of consumer prices from PriceStat, have consistently recorded higher levels of inflation.

And regardless of what the rate of price growth is right now, the hard truth of the situation for many American workers is that real average wage growth is mired in the red while average household debt levels have climbed to record highs.

While many would welcome higher wages and better jobs, the relationship between inflation and employment – as Janet Yellen herself admitted – has seemingly broken down. Whether the central bank can successfully push inflation higher is up for debate; it has struggled in recent years – despite pumping trillions of dollars into the economy. But regardless, higher consumer prices are not what Americans need right now.

In addition to Stiglitz and Kocherlakota, the letter a signed by Dean Baker from the Center of Economic and Policy Research, Heather Boushey, from Washington Center for Equitable Growth, Brad DeLong, University of California, Berkeley, Joseph Gagnon, Peterson Institute, Lawrence Mishel, Economic Policy Institute, William Spriggs, Howard University, Valerie Wilson, Economic Policy Institute, Gene Sperling, Obama Administration Economist, Jared Furman, Peterson Institute, Marc Jarsulic, Center for American Progress, Lawrence Bell, Johns Hopkins University, Josh Bivens, Economic Policy Institute, Tim Duy, University of Oregon, Manuel Pastor, University of Southern California, Mark Thoma, University of Oregon, Justin Wolfers, University of Michigan, David Blanchflower, Dartmouth College, Mike Konczal, Roosevelt Institute, Michael Madowitz, Center for American Progress.

*****

Read the full text of the letter below:

Dear Chair Yellen and the Board of Governors,

The end of this year will mark ten years since the beginning of the Great Recession. This recession and the slow recovery that followed was extraordinarily damaging to the livelihoods and financial security of tens of millions of American households. Accordingly, it should provoke a serious reappraisal of the key parameters governing macroeconomic policy.

One of these key parameters is the rate of inflation targeted by the Federal Reserve. In years past, a 2 percent inflation target seemed to give ample leverage with which the Fed could lower real interest rates. But given the evidence that the equilibrium interest rate had fallen substantially even prior to the financial crisis, and that the Fed’s short-term policy rate remained at zero for seven years without sparking any large acceleration of aggregate demand growth, a reassessment of this target seems warranted. Such a reassessment is particularly appropriate when the lack of evidence that moderately higher inflation would harm Americans’ standard of living is juxtaposed with the tremendous evidence that a tighter labor market would improve Americans’ standards of living.

Some Federal Reserve policymakers have acknowledged these shifting realities and indicated their willingness to reconsider the appropriate target level. For example, San Francisco Federal Reserve President John Williams noted the need for central banks to “adapt policy to changing economic circumstances,” in suggesting a higher inflation target, and Boston Federal Reserve President Eric Rosengren cited the different context in which the inflation target was set in emphasizing the need for debate about the right target. In May, Vice Chair Stanley Fischer highlighted the Canadian system of reconsidering the inflation target every five years, saying, “I can envisage – say, in the case of inflation targeting – a procedure in which you change the target or you change the other variables that are involved on some regular basis and through some regular participation.”

The comments made by Fischer, Rosengren, and Williams all underscore the ample evidence that the long-term neutral rate of interest may have fallen. Even if a 2 percent inflation target set an appropriate balance a decade ago, it is increasingly clear that the underlying changes in the economy would mean that, whatever the correct rate was then, it would be higher today. To ensure the future effectiveness of monetary policy in stabilizing the economy after negative shocks – specifically, to avoid the zero lower bound on the funds rate – this fall in the neutral rate may well need to be met with an increase in the long-run inflation target set by the Fed.

More immediately, new, post-crisis economic conditions suggest that a reiteration of the meaning of the Fed’s current target is in order. In its 2016 statement of long-run goals and strategy, the Federal Open Market Committee wrote: “The Committee would be concerned if inflation were running persistently above or below this objective.” Some FOMC participants, however, appear to instead consider 2 percent a hard ceiling that should never be breached, and justify their decision-making on that basis. It is important that the Federal Reserve makes clear – and operates policy based on – its stated goal that it aims to avoid inflation being either below or above its target.

Economies change over time. Recent decades have seen growing evidence that developed economies have harder times generating faster growth in aggregate demand than in decades past. Policymakers must be willing to rigorously assess the costs and benefits of previously-accepted policy parameters in response to economic changes. One of these key parameters that should be rigorously reassessed is the very low inflation targets that have guided monetary policy in recent decades. We believe that the Fed should appoint a diverse and representative blue ribbon commission with expertise, integrity, and transparency to evaluate and expeditiously recommend a path forward on these questions. We believe such a process will strengthen the Fed as an institution and its conduct of monetary policy, and help ensure wise policymaking for the years and decades to come.

The endgame, of course, is to pay off the old "expensive" dollars with new "cheap" dollars... quietly taxing the citizenry to death...

Commodities Bust Hits Farm Lenders, Delinquencies Surge 225%

Submitted by Wolf Richter via WolfStreet.com,

Just as the deflating Farmland bubble leaves its marks.

When it comes to agricultural debt, the numbers aren’t huge enough to take down the global financial system. But this shows how much pain the commodities rout is producing in the farm belt just when the farmland asset bubble that took three decades to create is deflating, and what specialized lenders and the agricultural enterprises they serve – some of them quite large – are currently struggling with in terms of delinquencies.

This is what delinquencies on loans for agricultural production – not including loans for farmland, which we’ll get to in a moment – look like:

From Q4 2014 to Q1 2017, delinquencies have soared by 225% to $1.4 billion, according to the Board of Governors of the Federal Reserve, which just released its report on delinquencies and charge-offs at all banks. This is the highest amount since Q1 2011, as delinquencies were falling after the Financial Crisis. That amount was first breached in Q4 2009.

The delinquency rate rose to 1.5%, the highest since Q3 2012. On the way up, going into the Financial Crisis, delinquencies breached that rate in Q1 2009.

These were the loans associated with agricultural production. In terms of loans associated with farmland, delinquencies have soared by 80% from Q3 2015 to Q1 2017, reaching $2.15 billion:

Farmland values have surged for three decades but are now in decline in many parts of the US. For example in the district of the Federal Reserve of Chicago (Illinois, Indiana, Iowa, Michigan, and Wisconsin), prices soared since 1986, in some years skyrocketing well into the double-digits, including 22% in 2011, and nearly tripling since 2004. It was the Great Farmland Bubble that had become favorite playground for hedge funds. But starting in 2014, prices have headed south.

This chart from the Chicago Fed’s AgLetter shows farmland prices in its district in two forms, adjusted for inflation (green line) and not adjusted for inflation (blue line):

Adjusted for inflation, farmland prices in the district fell 9.5% over the past three years. The exception is Wisconsin:

• Illinois -11%


• Indiana -7%


• Michigan -12%


• Iowa (since their 2012 peak) -15%


• Wisconsin +4%

The Chicago Fed adds this about the deflating farmland asset bubble, in inflation-adjusted terms:

Even after three annual declines, the index of inflation-adjusted farmland values for the District was nearly 60% higher in 2016 than its previous peak in 1979.

Does it mean to say that there is a lot more air to deflate out of the farmland bubble and a lot more pain to come and that this is just the beginning? Or is it saying that this is no big deal?

These falling farmland prices are making the debt much more precarious. So on a nationwide basis, the delinquency rate of farmland loans, according the Fed’s Board of Governors, jumped from 1.46% in Q3 2015 to 2.0% in Q1 2017.

In terms of magnitude of the dollars involved, agricultural and farmland loans pale compared to consumer or commercial loans. So the problems in the farm belt won’t cause the next Global Financial Crisis, and it progresses on its own terms. But it is putting strain on agricultural lenders, growers, and their communities.

Another asset bubble, a global one, is quietly but persistently experiencing a downturn that parallels and in some aspects already exceeds the one during the Financial Crisis. What the slow crash of classic cars says about the future of other asset classes. Read…  This Is How an Asset Bubble Gets Unwound these Days

Six Graphs That Reveal Big Problems For Student And Auto Loans

The New York Fed’s most recent household debt report showed ballooning debt and delinquency in student and auto loans. Total household debt has just about reached its previous late-2008 high of over $12.5 trillion.

You’ll notice that housing debt (blue) has not increased much since its 2013 low, meaning that the increases in total debt have mostly come from non-housing debt (red). A closer look at the composition of non-housing debt reveals that the biggest increases in debt have come from student and auto loans (red and green, below).

In fact, the numbers make it look like the housing bubble was almost exactly replaced by new bubbles in education and cars. From 2008 to 2016, housing debt has decreased by $1.01 trillion, while student and auto loan debt together have increased by $1.04 trillion. The Board of Governors of the Federal Reserve has an even higher estimate than the NY Fed for current student loan debt, at $1.41 trillion.

Shahein Nasiripour at Bloomberg showed the relative changes based on the same data this way:

While both student and auto loan debt have increased substantially, delinquency rates are higher for student loans. In 2012, student loan delinquency spiked up enough to claim the top spot, probably due to the number of people who chose more school over searching for employment during the bust. The graph below shows that student and auto loan delinquency rates are the only ones not decreasing.

Of course, this is more of an intended feature than a flaw of the Fed’s monetary policy since the housing bubble popped. Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another.

The redirection is mostly guided by new government interference in markets. Pre-2008, federal government programs to encourage new housing and mortgages, along with the low interest rates and new money from the Fed, created the housing bubble. Since 2008, programs like Cash for Clunkers, auto manufacturer bailouts, and income-based student loan repayment have funneled spending, borrowing, and increasing prices into education and autos.

Some recent headlines already signal a collapse in used car prices this year. Meanwhile, college tuition increases are still the norm every year, despite the decreasing value of a diploma. According to this AP report, “the average amount owed per borrower rose to $30,650 in 2016, after rising steadily for years. In 2013, borrowers on average owed $26,300.”

Another recent release by the NY Fed contains data on labor outcomes for college graduates versus all other laborers. There have been dramatic swings in employment across the board since 2008, but comparing September 2008 to September 2016 on net, the unemployment rate for college graduates has increased while the unemployment rate for all other workers has decreased. The underemployment rate (“defined as the share of graduates working in jobs that typically do not require a college degree”) for recent graduates has hovered around 45% since 2008. An indexed measure of job postings indicates that demand for laborers with a college degree has not increased as much as demand for laborers that don’t need a college degree, though both reached a peak late 2015.

The overwhelming conclusion from all of this data is that we almost certainly have new bubbles in education and the auto industry. A trillion dollars of housing debt has been replaced by a trillion dollars (or more) of student and auto loan debt. Delinquency rates are increasing for student and auto loans, while other loan types have seen a decrease in delinquency. Finally, the value of both the university education and the automobiles people are buying don’t seem to justify the amount being borrowed and spent, from a big picture perspective. Their prices are artificially inflated due to the Fed and the federal government teaming up to create new bubbles, just like they did to create the housing bubble.

Fed's Harker Blames 'Prime-Aged' American Male Joblessness On Drug Abuse

For 60 years the labor force participation rate of 25-54 year old men in America has declined. There are many reasons for this existential decline, but Philly Federal Reserve President Pat Harker explained today during a Q&A session that he is concerned that more 25-54 year old men are out of the workforce and blamed "drug abuse" for the problem.

That"s a lot of druggies...

This is not the first time Fed officials have claimed "drug abuse" as an excuse for the failure of their policies. 

As we detailed previously, via The Intercept"s Matt Stoller, in 2011, unemployment was at a near crisis level. The jobless rate was stuck around 9 percent nationally, an unusually high number due to the continuing effects of the financial crash. House Democrats were aghast. “With almost five unemployed Americans for every job opening, too many people remain jobless because of a lack of work, not a lack of wanting to work,” said Congressman Lloyd Doggett, D-Tex. So in early November 2011, they introduced a bill to reauthorize Federal unemployment benefits, an insurance program designed to aide those looking for work.

Behind closed doors at the Federal Reserve however, the conversation struck a different tone.

The Federal Reserve’s mandate is to promote “maximum employment,” which essentially means: print enough money so that everyone who wants one has a job. Yet according to transcripts released this month after the traditional five-year waiting period, Federal Reserve officials in November 2011 were debating whether unemployment was caused by bad work ethics and drug use – rather than by the greatest financial crisis in 80 years. This debate then factored into the argument over setting monetary policy.

“I frequently hear of jobs going unfilled because a large number of applicants have difficulty passing basic requirements like drug tests or simply demonstrating the requisite work ethic,” said Dennis Lockhart, a former Citibank executive who ran the Atlanta Federal Reserve Bank.

“One contact in the staffing industry told us that during their pretesting process, a majority - actually, 60 percent of applicants - failed to answer ‘0’ to the question of how many days a week it’s acceptable to miss work.”

The room of central bankers then broke into laughter.

Charles Plosser, the president of the Philadelphia Federal Reserve, cited “work ethic” as a common complaint he heard in his district, both in rural and inner city areas. A contact of his who owned 60 McDonald’s restaurants said “passing drug tests, passing literacy tests, and work ethic are the primary problems he has in hiring people.”

His wife, he noted, had attended a meeting in Philadelphia where employers cited literacy, work ethic, and drugs as impediments to hiring.

It was hardly the first time these bankers blamed unemployment on the unemployed, rather than, say, bankers. In an April meeting that year, Richmond Federal Reserve President Jeff Lacker told participants that “Several firms told us of difficulty finding adequate workers, because they preferred to collect unemployment benefits or can’t pass drug tests.” He reiterated that point in November, saying that in West Virginia he was told by an employment agency that “unquestionably the biggest problem in hiring skilled and unskilled workers was the inability to pass a drug test.”

Lacker’s Federal Reserve district includes West Virginia. In August, he again spoke of “widespread reports about hard drug use, OxyContin and methamphetamine, in Appalachia and other rural parts of our District—in particular, Appalachia.”

Apparently his colleagues responded with laughter again, because he then said “Drug abuse and the hardship involved in unemployment aren’t really laughing matters.” Usage, he noted, isn’t higher than the national norm in West Virginia. “It’s hard to pin this down quantitatively,” he continued, wondering if there was “something meaningful there as a contributor to impediments to labor market functioning.”

These debates took place within the Federal Open Market Committee (FOMC), the Federal Reserve body tasked with “influenc[ing] the availability and cost of money and credit to help promote national economic goals.” The debate revealed a split within the Federal Reserve system between “hawks” who worry more about inflation than unemployment, and “doves” who believe that too many are going without jobs. Typically, “hawks” tend to lean to the right politically, and “doves” tend to lean slightly more to the left.

Lacker is one of the most “hawkish” members of the FOMC, which means he tends to be in favor of higher interest rates and higher unemployment to ward off inflation. In 2015, Lacker ascribed increasing inequality to the lack of college education among the poor

Sarah Bloom Raskin, a dovish member of the Board of Governors, countered by saying that unemployment was a function of the financial crisis. “The economy remains mired in the worst slump since that of the 1930s,” she said.

Daniel Tarullo, another dovish Federal Reserve governor appointed by President Obama, called the focus on drug use a “red herring.” He said, “We had that problem 25 years ago, 20 years ago, 10 years ago; we have it today; and we’re going to have it 5 years from now.” He cited housing debt from the largest housing bubble in history as a core driver of unemployment.

The transcripts illustrate how the controversial method of picking Federal Reserve officials plays out in setting monetary policy: The three men who cited work ethic or drug use as a cause of unemployment instead of the financial crash were picked by regional private sector businessmen to lead the local Reserve banks.

The Dodd-Frank financial reform law passed in 2010 mandated that the Federal Reserve Board in Washington approve the choices of private businessmen, but the Board has yet to reject any suggested candidates. The board members who cited the financial crash as causing unemployment were appointed by the president and confirmed by the Senate.

The concept of having private business interests selecting public officials has been criticized by experts. As Wharton professor and author of “The Power and Independence of the Federal Reserve” Peter Conti-Brown put it, “It’s not clear at all that the opaque and obscure process by which the private sector selects the Reserve Bank presidents produces superior central bankers than the public process used to select the remaining principal officers of the United States.” This controversial selection process risks having, as he put it, “a system for enhancing the influence of certain slices of society on our central banking policy.

Lacker and Lockhart are retiring this year. Advocates and experts are putting pressure on the Richmond Federal Reserve to replace retiring Reserve Bank Presidents with someone more attuned to the reality of unemployment. Fed Up, a coalition of advocates seeking to shift the Fed from its traditionally pro-bank policies, is seeking to have the regional bank President’s picked with more attention to the needs of workers.

Jordan Haedtler, deputy campaign manager of Fed Up, lashed out at Lacker’s comments as related in the newly released transcripts. “Even nine years into the recovery, workers are still struggling to get the wages and hours they need,” Haedtler said. “Yet with unemployment above double digits in huge swaths of President Lacker’s district in 2011, he was citing anecdotes about drug use and desire to collect unemployment benefits as key reasons why employers weren’t hiring. Rather than looking for solutions and talking to people who were out of work, he was seeking excuses from employers.”

President Donald Trump has a number of vacancies on the Federal Reserve Board to fill as well. He has been highly critical of Federal Reserve Chair Janet Yellen. He argued, without citing evidence, that she pursued monetary policy goals to help support Barack Obama and elect Hillary Clinton. If Yellen and Tarullo follow custom and step down from their board slots in 2018, Trump could appoint a majority of Federal Reserve board members within two years.

Despite the importance of monetary policy, the Federal Reserve keeps the transcripts of internal deliberations of the committee that sets monetary policy out of public view for at least five years. But the people who attend those meetings take other jobs — some in the financial services industry. In 2010, incoming House Oversight Committee Chairman Darrell Issa questioned whether it was appropriate for the Fed to withhold its deliberations for so long. “If the Fed’s full transcripts can be released sooner, they should be,” he said.

The debate in the Fed and within Congress was ultimately resolved. The Federal Reserve kept interest rates low. And in 2011, a new wave of recently elected Tea Party Republicans and Democrats finally compromised on language to cut unemployment benefits.

Neither West Virginia senator, Shelley Moore Capito nor Joe Manchin, would comment on Lacker’s discussion of the West Virginia drug epidemic and its relationship to unemployment. The Appalachia region, including West Virginia, went strongly for Trump in the 2016 election.

So "The War On Drugs" needs more funding.. just a little more... and middle-aged men will be working again. Still Janet Yellen has the solution...

So immigration is helping labor force growth but middle-aged male American labor force participation is on a long-term trend of collapse?

Did The Fed Just Experience A "Margin Call" Moment?

Authored by Mark St.Cyr,

For those not familiar, the reference is attributed to a scene from the movie “Margin Call” where John Tuld (Jeremy Irons) makes the sanguinary argument for dumping its portfolio of toxic holdings immediately against contradictory arguments that it’ll be seen as panicking by others with the line, “It’s not panicking if you’re first.”

That one line in fiction contains volumes as to the reality about how Wall Street, bankers, and more view the world. Which is precisely why when I read the news that Federal Reserve member, and “Regulatory Point Man” Daniel Tarullo resigned unexpectedly I just sat back in my chair thinking, “Of course he did” as that afore-mentioned scene came to mind.

The reason why this sudden departure (remembering his term expires in 2022 some 5 years away) inspired thoughts as the above  that will surely be met with retorts such as “tinfoil wearing, conspiracy type” nonsense was not just the timing. But his resignation letter. To wit:

“After more than eight years as a member of the Board of Governors of the Federal Reserve System, I intend to resign my position on or around April 5, 2017. It has been a great privilege to work with former Chairman Bernanke and Chair Yellen during such a challenging period for the nation’s economy and financial system.”

Yep, that’s it. No alluding “health reasons.” No “need more time with family” qualifiers. Nor, anything else. Just a corporate styled, “Thanks, see Ya!” as to vacate 5 years early one of the most prestigious jobs in banking (Board of Governors) with quite possibly one, if not “the” most powerful agencies in the world, bar none. e.g., The Federal Reserve. Right, “Nothing to see here people, just move along, thanks for stopping by.”

If this doesn’t ring alarm-bells, than I guess Barron’s™ is right and “Next Stop Dow 30,000” here we come! Or, was that cover-story what signaled Mr. Tarullo to heed what it may portend (i.e., marking market tops) and thought, “Getting outta Dodge” before this thing falls apart first was the next prudent banking and career move? All one can do is speculate.

That said: It’s a fun thought experiment on one hand. But on the other? All I’ll say is this:

If you’re into market signals? These aren’t what you want to see emanating from the Fed. if you’re one of those still buying every dip horns-over-hooves. Because the next “dip” just may be a cliff. That is, unless you’re a vaunted investment “guru” on CNBC™ and your mail arrives 2 days late crushing your prior invest advice to then flip, then flip again only 6 days later back to what you argued was wrong to begin with. But I digress.

So again: Why would a member of the Fed suddenly resign?

Unless?

And that one word, much like the one line from the movie speaks volumes. The difference this time? It’s not in a fictional setting – it’s reality. And what it portends doesn’t have anything close to the intention of any movie. e.g., entertainment.

No, these signals are troubling at their root cause. i.e., The realization that the entire monetary system may in fact be teetering on the verge of chaos. And the finger-pointing has already begun directed squarely at central bankers, and in particular The Fed.

The abdication, its timing, along with its terse reasoning reinforces the argument that things are not as “great”, or “under-control” as the powers that be (e.g., central bankers) would have one believe. Especially from an institution that is supposedly hell-bent on making sure “signaling” or “policy” interpretations are delivered in a manner as to not be misconstrued.

From the outside looking in, it would appear either someone didn’t get that memo, or didn’t care.

The only thing more concerning is, if they did – and still didn’t care.

Again, there seems to be far more to this resignation by the very manner in which it was brought forth. And that’s not an “interpretation problem” for others to overcome. No: That’s a problem of interpreting at face value anything now emanating from the Fed. Period.

Why? I’ll propose it’s occurring at precisely the exact wrong time where “believe” and or “trust” that the Fed. knows or understands the implications of its decisions are needed.

And what is the current Fed. “smoke signals?” Utter shambles for anything resembling coherent, concise messaging.

Think I’m exaggerating or being hyperbolic? Fair point. Here’s just a few of the prevailing “arguments” one needs to try to decipher when attempting to understand current monetary policy and what it may, or may not, portend for the future.

One down, (e.g., Mr. Turullo) how many will follow? e.g., Is Fed. Governor Lael Brainard next? After all, Ms, Brainard was not only an ardent supporter of Mrs. Clinton, but she also appears misaligned with current policy messaging. i.e., Not to keen about hiking rates.

Or how about other arguments, along with statements such as this from Vice Chair Stanley Fischer: “There is quite significant uncertainty about what’s actually going to happen, I don’t think anyone quite knows.” when responding to a question about future fiscal policy which may, or may not, be forth coming in the U.S.

To me, the real trouble was what followed when he said: “At the moment we are going strictly according to what we see as our responsibility according to law.”

So, maybe it’s just me. But I’m quite sure that his boss, Chair Yellen, quite confidently alluded to at the last FOMC presser exactly what was needed and forthcoming, regardless of what came out of the current administration. i.e., Three rate hikes (via the Dot Plot) and possibly even more should they (The Fed.) see fit in reaction to anything “fiscal.” Has that changed? Again? And if it hasn’t? Is that still not an even bigger problem for the “markets?”

If the above referenced conference and articles are any clue? The messaging, and signaling are bordering on incoherent. Again!

Think there’s no reason to “panic” if you’re on the inside, let alone trying to gain insights from the outside looking in?

Remember when the scariest notion viewed by Wall Street was the possibility that the Fed. would even consider, let alone float the idea of winding down its balance sheet first, before exhausting all other “tools” or options? How many “think tank” aficionados along with the gaggle of Ivy Leagued Ph.D economists touted such a thing as “crazy talk” when the notion was ever brought up?

This even caused the former Chair to take to the keyboard on Jan. 26th 2017 and ask (or plead) that it wasn’t so.

Can you say “Oh, Oh?”

From St. Louis Fed. President Bullard’s discussion on 2/9/2017 for 2017 Monetary Policy. To wit:

“Now that the policy rate has been increased, the FOMC may be in a better position to allow reinvestment to end or to otherwise reduce the size of the balance sheet,”

So, are we to infer that if we are to get only one or two rate hikes, what we might actually see concurrent with that is the only other thing deemed even scarier in the eyes of Wall Street? e.g., Selling by the Fed. rather than buying?

Again, can you say, “Oh, Oh?” Or is this all “conspiracy”, “tin-foiled” cap wearing crazy talk?

Could be. Or, it could be fiction transforming into reality straight out of a scene in “Margin Call.” After all, as of November 15, 2016 Mr. Tarullo’s position was to carefully watch market reaction to Trump administration. And his conclusion?

Hint: Re-read the first paragraph while remembering: When it comes to “bag holders?” That’s not in their job description, that’s yours.

Barclays: "Significant Change Is Coming To The Fed Over The Next 18 Months"

Following yesterday"s surprise resignation announcement by Obama friend, and Fed "regulatory point man" Daniel Tarullo, which in turn followed last week"s resignation announcement by the Fed"s general counsel Scott Alvarez, and which means that there will be three open governor seats at the Fed (resulting in more Fed presidents, 5, than governors, 4, until the vacant slots are filled), Trump can now populate the Fed board with governors whose views echo his own - especially if strong pro-Clinton supporter and donor, Lael Brainard, is the next to go - even if it is still unclear just what that view is.

Between Trump"s USD-positive proposed trade policies and his USD-negative currency war statements, it remains to be seen if Trump wants a stronger or weaker US currency.

In any case, Barclays" Fed-watcher Michael Gapen warns that no matter what, "significant change is coming to the Federal Reserve Board of Governors over the next 18 months," although - like most other things in flux these days - what that change will be, is also unclear. What is more clear, however, is that "depending on the plans of Governor Lael Brainard, we would not be surprised to see five or six new faces on the board by the middle of 2018."

Gapen"s full thoughts below:

Fed Governor Daniel Tarullo to resign

Federal Reserve Board Governor Daniel Tarullo will resign on or around April 5, and the Federal Reserve’s website has posted a copy of his letter of resignation. The decision does not come as a surprise to us, given that Governor Tarullo has been acting in the capacity of the vice chair for supervision despite not being formally appointed to the position. Hence, any new appointment by the Trump administration to the Board of Governors could also be slated to fill the vice chair of supervision role and supplant Daniel Tarullo in the process.

One of the main priorities of the Trump administration is deregulation and reversing many of the components of the post-crisis financial regulatory landscape, including the potential repeal of Dodd-Frank and the Volcker Rule. News reports indicate that the Trump administration sees David Nason as a potential appointment to the board in the capacity of the vice chair for supervision. Nason is currently the president and CEO of GE Energy Financial Services and was previously the assistant secretary for financial institutions at the Department of the Treasury, including during the financial crisis as a member of Hank Paulson’s team.

Tarullo’s resignation only further cements our view that significant change is coming to the Federal Reserve Board of Governors over the next 18 months. Tarullo’s departure, alongside the two existing board vacancies, means that three new faces are likely this year, and Chair Yellen"s and Vice Chair Fischer’s terms are up in 2018. Depending on the plans of Governor Lael Brainard, we would not be surprised to see five or six new faces on the board by the middle of 2018.

As an aside, in an interesting note by Wharton assistant professor Peter Conti-Brown, he makes some interest observations on whether Trump will appoint a "Priebusian" or "Bannonist" filler for the Fed board:

If the President appoints Bannonists to those open vacancies, it’s essentially a declaration of war against the idea of independent central banking, as tangled as that label can be. At that point, the hard-money types in the Republican coalition, Democrats virtually everywhere, and perhaps especially Fed insiders will be on notice: if they value the idea of expert decision-making in the central bank, then the stakes couldn’t be higher. As the dust settles on this first generation of President Trump’s cabinet appointments, we should not let these two seemingly obscure appointments go unnoticed. They will be among the most important the President will make.

More here.

Why President Trump Will Fumigate The Fed

Submitted by Tommy Behnke via The Mises Institute,

Starting in January, President-elect Donald Trump will have a unique opportunity to pack the Federal Reserve with hard money officials.

There are currently two open Board of Governors seats, which will most likely not be filled before the end of President Obama’s tenure. Additionally, both Chair Janet Yellen and Vice-Chair Stanley Fischer’s terms will be up by 2018. Crunch the numbers and you will see that Trump has the opportunity to replace a majority of the Board of Governors and a third of the FOMC with monetary policy hawks during his presidency.

Call me crazy, but assuming that the Republican-controlled House and Senate stands behind him, I believe that Trump just may shock the financial world by shifting this country’s monetary policy in a more hawkish direction.

Yes, this is a guy that cheered on the Fed’s easy-money policies in the years before the Great Recession. And yes, Trump did say in May that he is still a “low interest rate person” who will appoint another dove to head the Federal Reserve. Why in the world, then, am I arguing that the Trump administration might possibly install more hawkish members to the central bank?

Repeated Anti-Fed Campaign Rhetoric

For one, Trump’s occasional dovish comments do not match the passion and enthusiasm of his repeated hawkish campaign trail rhetoric. For the past year, the president-elect has been railing against the “false economy” that the Fed has created, as well as the political influence that runs rampant throughout the central bank.

Perhaps Trump’s most scathing attack on the institution came last October, when he insinuated that Fed actions are crippling the middle class without creating any type of benefit to the economy at large.

“[Chairwoman Yellen] is keeping the economy going, barely,” he said. “You know who gets hurt the most [by her easy money policies]? The people that went through 40 years of their life and saved a hundred dollars every week [in the bank].” He then paused and shook his head for added effect before adding: “They worked all their lives to save and now what happens is they’re being forced into an inflated stock market and at some point they’ll get wiped out.”

These anti-Fed talking points were recycled often on the campaign trail. In September, Trump attacked the Fed for putting us in a “big, fat, ugly bubble” and for keeping rates artificially low for political purposes, points that he again repeated in the first presidential debate. The business mogul has also promised to audit the Fed within the first 100 days of his administration and even included a criticism of the central bank in a recent online video ad.

Sound Money Economic Advisers

Team Trump’s economic advisers paint an even more optimistic picture of his future monetary policy. Some of today’s most reasonable mainstream economic voices are included in his inner circle. These names include David Malpass of Encima Global, who co-signed a letter with Jim Grant opposing the Fed’s “inflationary” and “distortive” quantitative easing program; John Paulson of Paulson & Co., who made billions from shorting the housing market before the Great Recession; Andy Beal, a self-described "libertarian kind of guy" who blames the Fed for the credit crisis; and the Heritage Foundation’s Stephen Moore, who told CSIN in 2012 that he is a “very severe critic” of the Fed’s “incredibly easy-money policies policies of the past decade.”

While none of Trump’s economic advisers are by any means Austrians, they are far more hawkish than most of Presidents Bush and Obama’s past economic advisers. Ian Shepherdson, chief economist at Pantheon Macroeconomics, has even said that these advisers are pushing Trump to nominate two “hard money” candidates to fill the Fed’s current vacancies.

“A core view of many Trump advisors is that the extended period of emergency policy settings has promoted a bubble in the stock market, depressing the incomes of savers, scared the public and encouraged capital misallocation,” Shepherdson told Market Watch. “Right now, these are minority views on the Fed policymaking committee, but Trump appointees are likely to shift the needle.”

The Mike Pence Factor

Perhaps the best news for Austrians is that reports have indicated Trump may make his running mate the “most powerful vice president in history.” This is good news, because Mike Pence is one of the more hawkish voices in the modern Republican Party.

While in Congress, Pence expressed regular concern that the Fed was deteriorating the value of the dollar. He introduced legislation to end the dual mandate and even talked up a return to the gold standard.

In a high-profile 2010 speech to the Detroit Economic Club, Pence remarked that “while there is no guarantee that [the Fed’s bond-buying] will succeed in reducing unemployment, it is near certain that the value of the dollar will be diluted.” He then went on to say that “the time has come to have a debate over gold and the proper role it should play in our nation’s monetary affairs,” because “a pro-growth agenda begins with sound monetary policy.”

Conclusion

Trump’s election has given hard money advocates the most hope in over 30 years that our nation’s failed monetary policy will be reformed. Mixed with the current hawkish wave that is already percolating in the veins of some FOMC members, Trump’s future appointments can have a huge impact on the central bank’s immediate decision-making. One can only hope that the president-elect will stick to his guns and do the right thing. Regardless of what he does, however, it will surely be a step ahead of what the Hillary Clinton rubber dove stamp would have brought to the trading desks.