Recently, it has emerged that the US Central Bank is slowly reversing the consequences of the 'quantitative easing policy'. You can read exactly how that works in this analysis.
In the interest video of Friday 22 September we indicated that there are 2 developments that may change the chosen path of the Fed (American Central Bank). On the one hand, there are the economic consequences of the storms in the United States (US), and on the other hand, there is the matter of the composition of the interest rate committee. It will look very different next year.
Chairman determines the course
Although on paper the chairman of the Fed is equal to the other members of the interest rate committee, in practice he/she is much more powerful and influential. In short: it is the chairman who determines the course the Fed will take.
Right now, Janet Yellen is sitting in that seat. We know what her monetary preferences are: accommodative policy, keeping interest rates low and only raising interest rates when absolutely necessary. This must also be done very slowly. Her appointment as chairman expires on January 31, 2018. American law allows her term to be extended by another 4 years, but it is ultimately the American president who decides.
President Donald Trump has made several negative comments about Yellen during his election campaign. However, she has appeared more friendly lately, but it is still uncertain whether Trump will reappoint Yellen. If he does not reappoint her, Trump can appoint his own chairman for the bank and he can appoint an additional member for the interest rate committee. Yellen may remain a member of that committee (the terms of member and chairman are 2 different things). However, it is almost certain that Trump will not reappoint her as chairman.
The Interest Committee
The bank's interest rate committee consists of 12 members: 7 members of the executive board from Washington and 5 members of the 12 regional bank presidents who have voting rights according to a fixed schedule.
If we look at the daily management, we see that it currently consists of 4 people. Since American law requires that the executive board must consist of 7 members, President Trump will appoint 3 new members in the coming months.
However, it won't stop there. The bank's second-in-command, Vice Chairman Stanley Fisher, recently announced his intention to leave the Fed in October. Trump can therefore appoint 4 new members in the near future. If he also dismisses Yellen as chairman and she resigns, Trump can even appoint 5 members of the executive board.
Sharing his preferences
It wouldn't be surprising if he appoints people who share his monetary preferences. In short: keep interest rates low for as long as possible in order to boost the economy. Remember, Trump has promised annual economic growth of more than 3%. A higher interest rate would guarantee that this will not happen.
5 people who lean towards an accommodative monetary policy, in combination with the fact that those voting regional bank presidents also want that, means that a significantly changed Fed will be visible in the course of 2018. And it will be even more in line with keeping interest rates low for as long as possible.
All this can have significant consequences for interest rate policy. Each appointment is for 14 years. And it is the daily management that, when a regional bank chief leaves the field, determines who will succeed him/her. Trump can thus influence monetary policy in the United States for a period that lasts much longer than his presidency.
In concrete terms, this means that we must take into account that the Fed's amended interest rate committee may deviate from the set course. The bank will increase interest rates less often and less quickly than the 'Trump-Fed' will increase the main monetary rate in the US more quickly and sharply.