Deutsche Bank Ponders The Cosmic Paradox Of Trumpian Monetary Policy

The next Fed governors will have to deviate from Yellen by doing exactly as she has done.
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Casting about for a topic vexing enough to get their minds off their currentsituation, analysts at Deutsche Bank have landed on the riddle that is the Trump Fed. Within 18 months, Trump will install as many as five board members. But who they might be, and what end of the dove-hawk spectrum they'll occupy, remains a bit of a mystery. From the FT:

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Given his propensity to choose nominees outside the typical political and policy-making circles, Mr Trump’s choices will not only be influential, they could also be unanticipated, possibly leading to wild market swings as investors race to understand the nominee’s positions and price in those expectations.

What does Trump want out of the Fed? Parsing his various positions on the matter is akin to pondering a Zen koan. The only constant is contradiction. On one hand, Yellen has kept rates too low in order to artificially juice the Obama economy. But low rates are good and the economy is a mess.

“I am a low interest-rate person,” he said in May of last year. “Right now I am for low interest rates, and I think we keep them low, and we have to compete.”

Then, in September: “They’re keeping the rates down so that everything else doesn’t go down. We have a very false economy.” Later that month: “Janet Yellen of the Fed—the Fed is doing political things by keeping the interest rates at this level.”

In sum, the Fed has been overly political in pursuing monetary policy that Trump himself would have them pursue.

Deutsche Bank, bless their hearts, tried to make sense of it all, suggesting some names that might end up in the Fed. Stanford's John Taylor for instance:

would fit with Republican views for a more rules-based Fed. [But] his policy leanings — more aggressive rate increases and the stronger dollar that would result — would work against Trump’s pro-growth agenda.

And so on.

If you find yourself getting a headache, relax. Like the sound of one hand clapping, the puzzle has no answer. Sit back and enjoy the paradox. Bong rips also help.

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