Musical (FOMC) chairs

Now that the Fed week has ended and we’re on the home stretch for the year, investors are starting to think about next year. In terms of monetary policy, it appears to be clear that it will be accommodative. Trump has publicly said he wants rates at 1%, but the market has learned (hopefully) to take his comments with a grain of salt. But the direction is clear. And it’s also clear that the Fed will be less independent from now on. The president wants to be “consulted” on monetary policy. And he’s about to announce who the new chairman will be for the next 12 years. But Powell does not leave until May, and patience is running thin. Interestingly, the chairman of the Fed doesn’t necessarily mean he/she will be the chairman of the FOMC: the FOMC’s voting members can elect a chair other than Jerome Powell to lead the committee and conduct U.S. monetary policy, though this has never occurred in practice and would be highly unusual. But this is precisely what Trump likes, unprecedented and highly unusual. How would it work? The FOMC has 12 voting members: all 7 members of the Federal Reserve Board of Governors (including Powell as a governor), the president of the Federal Reserve Bank of New York, and 4 rotating presidents from the other 11 Reserve Banks. These members collectively decide on monetary policy actions, such as interest rate changes, through majority votes. By statute and FOMC rules, the committee elects its own chair internally at its first meeting of the year (typically late January). Any of the 12 voting members is eligible. The elected chair presides over FOMC meetings, sets the agenda, and leads discussions on monetary policy implementation. The FOMC also elects a vice chair (customarily the New York Fed president). This means the voting members could, in theory, select a different FOMC member to replace Powell as FOMC chair, even if he remains a Board governor with a voting seat. Such a move would create a “split chairmanship,” where the Board and FOMC have different leaders, potentially complicating policy coordination. The odds for a split chair are very low, and there are still a lot of advocates for Powell sitted at the table, but Trump can put a lot of pressure on governors if they don’t vote to lower rates, and depending on how the year starts for the market, and who is finally announced as the new chair, things can move rather quickly and votes can change. We’re entering into a new Fed cycle, which promises to be way different than the recent past ones.

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