February 2018 will be a turning point for the Federal Reserve System of the United States and for the world economy as a whole. In February, Janet Yellen’s tenure as chairman of the Council expires, which means that one of the most influential financial organizations in the world will be headed by another person. Who would that be and how would it affect the Organization’s activities? In this article, we will try to answer these questions.
Let’s go back a bit. In the summer of 2017, President Trump openly declared his displeasure with the policy of Yellen. He accused her of collusion with the previous President Barack Obama, saying that the Fed rate hike was artificially held back to create the illusion of prosperity in the American economy. President Trump made it clear that Yellen would not be allowed to stay for a second term, which was a violation of the unspoken American tradition.
A few months ago, Trump said that he was considering five candidates for the post of head of the Fed, but did not name them. The experts attempted to compile a list of this five, which over time narrowed to only two people — Jerome Powell and Kevin Warsh. These two candidates radically differ from each other and the power gaining of each of them will mean a fundamentally different development of events.
Kevin Warsh expressed the dissatisfaction activities of the Central bank and its information policy, criticized the asset-buying program and accused the Fed leaders of inability to revive the economy. If he comes to power, it will mean a noticeable reversal in the monetary policy of the Fed. Jerome Powell, on the contrary, supported the policy of Yellen and established himself as a “man of the middle.”
Trump’s summer statements created the feeling that Kevin Warsh had more chances. But, unexpectedly for everyone, in early November Trump announced that Jerome Powell would become the next chairman of the Fed. During the announcement of the candidate, he said that Jeremy will be able to find consensus and guide the economy by solving complex problems. Apparently, Trump realized that with so many critics, he needs compromise people.
In that case, what should we expect from the Fed next year? With the new Fed, the soft monetary policy of the regulator will continue. No sudden movements will be made by the Federal Reserve. The Fed’s key interest rate will be cautiously increased. Today it is in the range of 1.0% – 1.25%. Janet Yellen said that by the end of 2018, it could reach the 2.0% level, and Powell agreed with her. Therefore, we can expect that within the next year there may be another three or four decisions of the Committee on Open Market Operations to raise the rate. Each step will be equal to 0.25%. Earlier, Trump demanded a significant increase in rates. Apparently, he has changed his point of view. And it is not surprising — a sharp increase in the Fed’s key rate will inevitably lead to a strengthening of the US dollar, which would put an end to Trump’s plans to increase the competitiveness of the US economy and eliminate the huge deficit of the US trade balance.
Thus, the change of power in the Federal Reserve will not bring significant changes, as was previously expected. The rate increase will occur, but it will be insignificant and not sharp. We have almost a year to prepare for this increase, so no significant discomfort will be felt. The continuation of the previous policy became good news for long-term investors. In the current situation, they can easily make forecasts for the year ahead and don’t be afraid of the unexpected turns. It seems that for the first time Trump has taken a favorable decision for all.