The U.S. Federal Reserve building in Washington, D.C.
Adam Jeffery | CNBC
The market and the Federal Reserve are currently far apart when it comes to expectations of where rates are headed. Two candidates who President Donald Trump said he is going to nominate to the central bank could bring them closer together.
In a tweet Tuesday, the president said he plans on sending the names of Christopher Waller and Judy Shelton to the Senate as Fed governor appointees. Shelton was no surprise — Trump already has named her to a government post and previously indicated he’s interested in her for the Fed job.
Waller is a bit more of a cipher. As head of research at the St. Louis Fed, he’s maintained a low-key presence that makes it a bit more difficult to know where he’d try to take the broader central bank.
Taken together, though, they represent advancement of a key Trump belief, namely that the Fed needs to be a more complicit partner in pushing the economic expansion higher, and should be doing so through lower interest rates and looser policy overall.
“For the president, these are people who would support his position,” said Gus Faucher, chief economist at PNC. “The president has the right to appoint people to the Fed who support his view on monetary policy. That being said, this is one area in particular where the Senate has rebuffed the president for various reasons.”
Indeed, Trump has struck out on his last four Fed prospective nominees. The last two in particular, Stephen Moore and Herman Cain, fell out of the process amid complications from issues other than their views on monetary policy and regulation.
As it pertains to Waller and Shelton, the two candidates more likely would face a tussle tied directly to their views.
Both seem to favor lower rates, at least for now, with Shelton explicitly saying she thinks the Fed’s benchmark overnight rate should be around zero and Waller joining her in rejecting the traditional Phillips Curve argument that as unemployment falls, wages should rise and push inflation, necessitating rate hikes.
That issue is important considering the vast gap between market rate expectations and Fed projections.
In the latest quarterly forecast, Federal Open Market Committee members see the long-run benchmark rate around 2.8%. Current pricing in the fed funds futures implies a rate closer to 1.3%.
‘Troika’ would still be in charge
For his part, Trump favors the market view, reasoning that at a time when most of its G-7 counterparts are keeping policy rates around zero, the Fed is making the U.S. less competitive globally by pegging the funds rate in a range between 2.25% and 2.5%.
Waller and Shelton “would bring two dovish votes” to the Fed “while leaving the troika” of Chairman Jerome Powell, Vice Chair Richard Clarida and New York Fed President John Williams still “in control of the direction of Fed policy,” Krishna Guha, head of global policy and central bank strategy for Evercore ISI, said in a note.
Trump has been harshly critical of Powell, whom the president appointed in 2018 to take over from Janet Yellen.
From a market perspective, the two probable nominees are likely part of a trend making it clear that “the Fed is not going to be the one that upsets the apple cart for the equity market,” David Rosenberg, senior economist and strategist at Gluskin Sheff, said in his daily note Wednesday.
Rosenberg also noted Shelton’s affinity expressed in the past for the gold standard, something that ironically might make her more inclined to raise rates to keep the U.S. dollar value steady.
“As the Fed eases, the [yield] curve will steepen … and melt. That process for a more aggressive Fed received a shot in the arm with President Trump’s two choices to the board of governors – Christopher Waller and Judy Shelton,” Rosenberg wrote. “The latter advocates both a dollar-link to gold and rates to go to zero in the next two years … time to start building your own Fort Knox.”
A ‘maverick’ vote
To be sure, both will represent only two votes on a committee that thus far has seen little dissent in first raising rates and then holding them steady despite the market clamor for cuts.
However, the Fed’s “dot plot” from the June FOMC meeting, which shows where individual members expect rates to go over the next few years, indicated a close divide between those wanting to hold steady and those wanting to cut. Getting two governors who are leaning to the dovish side might help sway the vote.
Shelton would bring a “maverick view” to the committee, said Michael D. Bordo, professor of economics at Rutgers University and a member of the Shadow Open Market Committee of economists who monitor Fed policy.
“Having one moderate on the FOMC doesn’t change things too much,” he said.
“The question is how they could vote in the very near term and how they would vote over their tenure on the FOMC. Those are very different questions,” he added. “One could argue that because Judy Shelton is a champion of Donald Trump, she’ll always figure out what he wants and vote dovishly, which may be the case. But if she’s a half-decent analyst, she may not always go that way.”
As for Waller, Bordo said he knows him and is familiar with his work. Examining Waller’s stance, Bordo said he’s just as likely to be more hawkish, or in favor of higher rates, over the long term as he is dovish near-term. The St. Louis Fed, where Bordo is an economist, is headed by President James Bullard, who has pushed the Fed to lower rates and was the lone vote against holding steady at the June FOMC meeting.
“I’ve studied how FOMC people vote over time, and people aren’t consistent. Hawks don’t always vote to tighten and doves don’t always vote to loosen,” Bordo said. “What they do is conditioned on what’s going on in the economy.”
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