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.