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Trump Can Mold Federal Reserve in His Image

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President Donald Trump will have the opportunity to mold the Federal Reserve in his own image. But what that will look like remains to be seen.

As Jim Rickards points out, Trump will appoint a higher percentage of the Fed’s board of governors than any president since Woodrow Wilson chose the original board.

Seven members make up the Federal Reserve’s board of governors. Of course, regional reserve bank presidents also have some influence. But you find the real decision making power on the board. As of last week, four of the seven Fed board seats are vacant.

Consider the power this gives the president. Four seats makes up a voting majority.

Trump will own the Fed. Meaning, whatever the president wants monetary policy to be, he’ll get. In other words, Donald Trump will be able to shape the Fed’s majority. But the tricky part is figuring out how he plans to shape it.”

As Rickards points out, Trump harped on China as a currency manipulator during the campaign, and signaled he wanted a weaker dollar. He certainly got that wish. The dollar has already dropped about 12% on the year, and it’s on track for its worst year since 1985. That was the beginning of a decade long bear market for the dollar. Peter Schiff says he thinks this one will be worse.

I think this one is going to be the mother of all dollar bear markets, and I think the dollar is going to fall much further than it did in any prior bear market.”

Peter has argued that investors fleeing the dollar has been a big factor in the recent gold bull run.

Trump backed off China hoping the Chinese would help rein in North Korea. But China hasn’t exactly delivered. Rickards thinks a trade war with China is imminent. In fact, Trump has reportedly been pushing hard for tariffs. This would lead one to believe he will go with a “dovish” Fed board. But Rickards said he wouldn’t be surprised if the president goes the other way.

Don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations. Trump advisers include hard-money advocates like Dr. Judy Shelton, David Malpass, Steve Moore and Larry Kudlow. I expect Trump to heed their advice.”

We also have the matter of Yellen. Her term ends in less than five months. Will Trump appoint a new chair or will Yellen stay at the helm? That’s up in the air as well.

In the meantime, a lot of uncertainty over the Fed’s direction will hover over the market, as if there wasn’t enough uncertainty in the market already. But one thing is certain: The next Fed head will have a lot on his plate.”

So, Trump will put his stamp on the Fed. But as with most things Trumpian, what that will look like is anybody’s guess. Regardless, the Fed will still be stuck between a rock and a hard place. If it tightens, it risks bursting  all of the bubbles its created. If it doesn’t “normalize,” it risks inflating bubbles further or setting off a currency crisis leading. No matter who the central bankers are or what they do, they are on the road to trouble.

Trump photo by Gage Skidmore via Flickr used under creative commons licence.

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