President Donald Trump now has to nominate three Fed governors, as Daniel Tarullo has announced he will step down on 5 April. While Trump has expressed different views on monetary policy, we think it is most likely that he will appoint hawkish governors.
Fed Chair Yellen’s and Vice Chair Fischer’s terms expire in 2018 (in February and June, respectively) and Trump has indicated he would be likely to replace them. One of Trump’s nominees for the three vacant seats is likely the next Fed Chair.
Trump is likely to nominate a total of five new governors over the next two years, as Yellen and Fischer are expected to leave the Fed if they are not reappointed.
The Fed may become more rule-based in coming years due to Trump’s nominations. A simple Taylor rule based on PCE core inflation and output gap suggests the Fed funds rate should be 3.0% currently. It is more difficult to predict the impact on overall US yields, as it also depends on the impact on inflation expectations.
The Fed’s independence may come under greater pressure, as tighter monetary policy would offset Trump’s expansionary fiscal policy, which could frustrate him.
