During the election campaign in the US, then-presidential candidate Donald Trump said he finds a higher official interest rate from the Fed, the American central bank, desirable for America.
Trump did not agree with the current monetary policy of the US central bank. According to Trump, the chair of the Fed's interest rate committee, Janet Yellen, should be ashamed of the policy pursued under her chairmanship.
New chairman?
Since her term as chairman expires in early 2018 and it is customary for the White House to announce months before whether the incumbent chairman will be reappointed or not, Yellen's departure seemed almost certain.
The new chairman would then have to be much more on the monetary Trump line. This would mean that the central bank would have to radically change monetary policy. The slow interest rate increases and the attempts to keep official interest rates low for as long as possible must then disappear. Instead, significant steps in that area should be expected.
Trump appointments
Why is that? Because there would be all Trump appointments on the interest rate committee and Trump himself, as mentioned, does not like the policy being pursued and considers a higher interest rate desirable.
These are Trump appointments, because the new President can also fill 2 vacancies in the interest rate committee. The vice chairman will also leave the bank in 2018, allowing Trump to appoint another board member. A few weeks ago, a sitting board member, appointed by President Obama, announced that he would soon resign.
However, what we should not forget was that Trump had made statements about higher interest rates and the unsuitability of Yellen as chairman during his election campaign. When he actually won the election, we wrote that the question was whether he would still be so happy with a series of interest rate increases by the Fed.
Respect for Yellen
This week it has become clear that expectations about a radically different Fed under President Trump can indeed be thrown away. Regarding the Fed's low interest rate policy, Trump now says that he 'frankly thinks it is a good policy'. Fed Chairman Yellen suddenly thinks President Trump is a good chairman and even has respect for her, while presidential candidate Trump used completely different words when talking about the Fed boss.
And about her possible reappointment, Trump now says that it is 'too early to judge'. True, he does not say that he will reappoint her, but, more importantly, he also does not say that Yellen can pack her bags. It would not be surprising if he simply extends her term of chairmanship, citing the reason that he does not want to saddle the market with additional uncertainty about the Fed's actions and actions.
Low interest rates seem to be in sight
With the increasing chance that Yellen will remain at the monetary helm in the US for the time being, the chance also increases that the Fed will keep interest rates very low for a long time. Even if the bank raises the main interest rate further this year. We know that Yellen mainly emphasizes economic growth and is not exactly the type of central banker who is happy to raise interest rates.
Last Friday's labor market report showed that American companies had created 98.000 new jobs. That is significantly less than the 200.000 per month at the beginning of this year.
In science, in practice it is the chairman who determines the Fed's policy. That means that, with the above story in mind, the chance of a monetary shock from the United States, in the sense of the Fed raising rates faster than the market now expects, is very small.
EUR/USD temporarily under upward pressure
If this scenario does indeed come true, no one would be surprised if EUR/USD temporarily comes under upward pressure. After all, interest rates have fallen in recent months, partly due to the expectation that the Fed would increase interest rates several times, while the ECB will not do anything on that front for a long time. If the market sees reason to estimate the number of interest rate hikes in the US lower this year and next, this could have an impact on EUR/USD.
Keep in mind that if EUR/USD were to come under considerable upward pressure, the ECB would most likely not sit still, but would hint at an even looser policy. The bank does not want a stronger euro, because that could slow down the economic recovery and push down inflation. Both are things that the ECB wants to avoid at all costs.