Culture Change

Dr. Janet Yellen’s term as Chair of the Board of Governors of the Federal Reserve (Fed) System ends in early 2018. While she could be reappointed for another four-year term as Chair, reading the tea leaves in Washington D.C. suggests a scenario where we may see a person from a business career take over the gavel. And not just as Chair. There are three vacancies on the Board of Governors, and we also expect a new Vice-Chair in the summer of 2018. That is, there is a potential for five new board members on a seven-member board, and some or all of those seats could be filled with business-career credentialed individuals instead of persons with academic or central bank experience.  This could usher in a major cultural change at the Fed. Such a cultural shift might make a very big difference in how decisions about interest rate policy may be made.

Our intuition is that more business experience on the Fed Board of Governors and fewer economists will shift the debate away from academic interpretations of monetary policy and increase the focus on the interplay of rates and debt. More specifically, the high debt loads in the U.S. will create a bias for lower than otherwise rates, so that increases in debt-service expenses do not derail an economic recovery. Over the long haul, if this scenario prevails, a bias toward lower rates relative to inflation is likely to also lead to a weaker trend for the U.S. dollar as well.