Across the Curve

The New York Times is reporting that the Trump Administration has settled on nominees for 2 of the 3 open Fed Board slots.

Randall Quarles is said to be the appointee for the Vice Chair in charge of bank regulation, effectively replacing Tarullo.  His name has been out there for a while and I wrote about him when he was first rumored to be appointed.  I am attaching that email to this piece.

The other name, which is new, is Marvin Goodfriend.  I actually worked for Marvin for a while when I was a young Junior Economist at the Richmond Fed.  At the time, he was the Director of Research, essentially the #2 policy guy at the bank.  He left the Richmond Fed for academia about a decade ago and is currently one of the leaders of the Shadow Open Market Committee.  Goodfriend is by and large true to the relatively hawkish philosophy that the Richmond Fed is known for, but in recent years, I would say that his writings with regard to the Fed have been more focused on two other related topics: 1) a more systematic, i.e. rules-based, approach to monetary policy and 2) unwinding some of the more controversial aspects of the Fed’s extraordinary easing during the crisis.  His focus over the years has been on inflation and what the Fed needs to do to establish and preserve credibility (i.e. lock in inflation expectations).  He is a big fan of having a more systematic policy regime (i.e. using some sort of rule as a benchmark) to do that.  On the second point, he is very much not a fan of the Fed buying anything but Treasuries to expand its balance sheet.  In his view, this amounts to fiscal policy because it allocates credit (e.g. to the housing industry), creating winners and losers in the economy.  He has been a critic of the Fed holding a massive MBS portfolio.

So, if these two nominees are eventually confirmed, the tone of the Fed Board will instantly swing to a far more hawkish tenor.  Many market participants have been barking up the wrong tree, arguing that Trump is an easy money guy because he borrowed a lot when he was a real-estate tycoon.  As with so much else so far in his Administration, after you sift through all of the tweeting and extraneous noise, his platform has been very much traditional Republican in most economic areas (with the clear exception of trade policy).  Likewise, his rumored Fed nominees are people who are likely to be far more sympathetic to much of his fiscal and regulatory agenda and, perhaps more importantly from a market perspective, are likely to shift the thinking of the Fed away from the radically dovish stance seen since the crisis and back toward a more traditional posture.  The trajectory of rates may or may not be altered significantly, but if this story is correct, I am pretty confident that the balance sheet will normalize more quickly under the 2018 FOMC than it would have under the 2016 FOMC.  Look for the Chair slot to be filled by someone who is closer to Goodfriend and Quarles than to Yellen.