President Trump and Federal Reserve Chair Janet Yellen haven’t always gotten along. Yellen is a Democrat and an Obama appointee. During his presidential campaign, Trump said Yellen should be “ashamed” of herself for keeping interest rates too low. He accused her of creating a “false stock market” to make Obama look good.
Trump predicted that if he won, Yellen would sharply raise interest rates to cause an economic downturn. A downturn that the public would blame on him.
President Trump has been more friendly than candidate Trump, praising the Fed chair. Yellen has increased the Fed’s benchmark rate from .75% to 1.25% since Trump entered office. The Fed is expected to raise rates one more time in 2017, but for the most part, loose monetary policy has supported the “Trump Bump” on stock markets.
Interest rates are important for stock market investors. Higher rates increase the cost of borrowing, which means funds and investors have less money to use on stock markets. It also means less consumer spending, which cuts into corporate profits.
Yellen’s term runs out in February 2018, and analysts are already speculating about her replacement. Here are some of the top names being thrown about:
Gary Cohn – White House senior economic advisor Gary Cohn is the favorite to replace Yellen next year, according to a recent survey of top economists. Cohn is a former Goldman Sachs executive who currently directs the National Economic Council. He’s close to the president.
Cohn is considered a hawk on monetary policy, preferring higher interest rates to reduce the risk of inflation. That sets him apart from Trump, who prefers to pump liquidity into stock markets through low interest rates.
What Cohn would mean for stock markets: Cohn has no background as an academic economist, and some analysts aren’t sure what to expect from him. Maybe Cohn would raise rates, maybe he wouldn’t. In either case, stock market investors need clear signals about what to expect.
Kevin Warsh – Warsh worked as a Fed governor from 2006 to 2011. He worked at Morgan Stanley before that. He’s a noted hawk—back in 2009, he argued against using low interest rates to help America recover from the Great Recession.
Since leaving the Fed, Warsh has continued to argue that higher rates are needed to purge risk from US financial markets. He’s considered a dark horse candidate for the role.
What Warsh would mean for stock markets: Warsh would likely pick up the pace on interest rate hikes. In the short term, that would reduce liquidity and potentially cause a stock market slowdown.
Glenn Hubbard – The former chief economist for George W. Bush has never seen a tax cut he didn’t like. He was considered for the Fed chair position back in 2006, losing to Ben Bernanke. He’s hawkish, in favor of creating clear rules for monetary policy and shrinking the Fed’s $4.5 billion balance sheet.
What Hubbard would mean for stock markets: Similar to Warsh, a Hubbard chairmanship would likely mean higher interest rates. In the short run, that wouldn’t be good for stocks.
Janet Yellen – That’s right. Yellen herself has a real chance of being appointed to a second term by President Trump. She’s viewed as a dove on monetary policy, using low interest rates to support economic growth. In that sense, Yellen and Trump actually have a lot in common.
What Yellen would mean for stock markets: Yellen has skillfully walked a tightrope as Fed chair, gradually raising rates to prevent inflation, but keeping them low enough to keep the Trump Bump moving forward. A second four-year term for Yellen would be good for stock market investors.