President Trump Changes His Tone on Yellen and the Fed

April 26 2017

When on November 9, deep after midnight, it became known that Donald Trump would become the next president of the United States, many expected that it would mean a complete overhaul of the Fed, with a radical shift in the bank’s monetary policy as one of the consequences.

After all, during the election campaign, Trump repeatedly stated that, among many other things, he would find a higher official interest rate desirable, and that he did not agree with the Fed’s monetary policy. The Fed Chair, Janet Yellen, should have been ashamed of herself, according to Trump, for the monetary policy that was pursued under her leadership. Since her term ends at the beginning of 2018 and it should, therefore, become clear in the course of this year whether she will be reappointed and given the fact that Trump will decide whether or not she will be reappointed, the fate of Yellen as future Fed Chair appeared to be sealed.

Add to that the two FOMC vacancies and the fact that the current Vice Chair, Stanley Fischer, will step down in 2018 as well, and many arrived at the conclusion that the Fed would very soon have an entirely new monetary squad in place. A monetary squad that would raise interest rates faster than expected. Why? Because the FOMC would consist of mere Trump-appointees and Trump himself, as we remarked earlier, was not a big fan of current monetary policy and said higher interest rates were desirable.

On December 16, I wrote that I was skeptical about this suggested radical shift in monetary policy with the election of Trump: “Do not forget that Trump argued in favor of higher interest rates during his election campaign. Now that he became president, I highly doubt whether he continues to be happy with a series of rate hikes.”

Respect for Yellen

This week has showed that expectations about a radically different Fed under president Trump can, indeed, be thrown out with the garbage. On the low interest rate policy of the Fed, Trump stated that he “now thinks it is a good policy.” President Trump has been remarkably positive about Fed Chair Janet Yellen and respects her, whereas presidential candidate Trump used completely different language when he talked about the Fed Chair. And regarding her possible reappointment, Trump now says that it is “too early to judge.” It would not surprise me if, after all, he simply extends her term as chair, by arguing that he does not want to create more uncertainty in markets with regard to future Fed moves.

I would not be surprised if all the above will have positive repercussions for precious metals. With the increasing odds that Yellen remains in power, the odds also increase that the Fed-rate will remain way too low for too long, even if the bank raises the most important interest rate another notch this year (read more in last week’s article). We know that Yellen puts a lot of emphasis on economic growth and that she is not quite the type of central banker that is eager to increase interest rates.

Fully aware of the fact that in practice the Fed Chair determines Fed monetary policy, the above implies that the odds of a monetary shock from the US, in the sense that the Fed raises rates faster than the market currently expects, are very low.

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