How Trump Will Change the Fed Forever

The president has a significant impact on the Fed since each president appoints a chair. President Donald Trump now has his chance to leave his mark.

Federal Reserve officials like to say the Fed is above politics. It’s even designed to be that way.

The Board of Governors of the Federal Reserve System supervises the Fed. Individual governors vote on changes in interest rates and other policy decisions.

Governors serve 14-year terms. One term expires every two years. That prevents any one president from filling the board with his or her nominees.

An appointed chair heads the Board of Governors. Fed chairs serve four-year terms. The chair’s term ends in the middle of the president’s term. This is another step toward freedom from political interference.

Despite these safeguards, the president still has a significant impact on the Fed since each president appoints a chair. President Donald Trump now has his chance to leave his mark on the Fed.

Remaking the Fed

Trump will soon decide on the next chair from what advisers say is a list of three finalists. The current chair, Janet Yellen, is still in the running. Insiders say the two front-runners are current Fed Gov. Jerome Powell and Stanford economist John Taylor.


Powell’s philosophy is like Yellen’s. He would bring little change.

Taylor, on the other hand, could remake the Fed into a rules-driven machine. He defined a rule to determine the right interest rate. This rule would replace the use of judgment like the Fed currently does.

Taylor’s rule looks at inflation and gross domestic product (GDP) growth, a common measure of economic activity. The result is an objective measure of what the interest rate should be. The current system sets interest rates based on the best guess of Fed governors.

Usually, the best guess is close to the rule’s answer. But, right now, the gap between the two is significant. The effective fed funds rate, the Fed’s benchmark for short-term rates, is the red line in the chart below. Taylor’s rule is the blue line.

The president has a significant impact on the Fed since each president appoints a chair. President Donald Trump now has his chance to leave his mark.

(Source: Federal Reserve)

The Fed is holding rates about 3% below the level suggested by the Taylor rule.

This is important because when rates are too low, inflation can take hold. The Fed may be slow to respond to inflation while Taylor’s rule acts quickly since it’s data driven.

The Wisdom of Having a Rule

Economists debate the wisdom of having a rule, but a rule would help the Fed avoid problems. A rule would also help the Fed respond in the face of a crisis like it faced in 2008. The Taylor rule suggests that rate cuts should have started about three months earlier, and that could have prevented large losses in the stock market.

The rule also identifies when negative rates are appropriate. It shows when economic growth supports higher rates.

And a rules-based Fed would lead to higher highs in the stock market since traders would know what the Fed is going to do.

Current Fed officials admit transparency is good. Several policies tell traders what to expect. This includes the chair’s quarterly press conferences.

As chair, Taylor would reduce the importance of the Fed’s meetings and press conferences. He would impose discipline on the process.

Taylor would change the Fed forever, and Trump’s legacy on monetary policy would stand alongside President Ronald Reagan’s, who appointed Alan Greenspan.


Michael Carr, CMT
Editor, Peak Velocity Trader

  • Thomas Waldenfels

    Uh huh, and what will fundamentally change at the criminal Fed? NOTHING.

    The institution is a cancer on the Republic. Who runs it matters some, but not much. Like the Gambino crime family. Ddoes it matter if the capo is John Gotti or Nick Corozzo? Not really.

  • Derek Hough

    Well said Sir. The US government effectively abdicated

  • Steven Worley

    So President Trump has a list of three. He like all presidents before him is provided a list from the Council on Foreign Relations as to who will be the next chair. They have controlled the Fed since its inception and will continue. The CFR was founded in 1921 for one reason, to ultimately bring about a One World Order after the failed attempt with the League of Nations. They who control the money supply are more dangerous than a standing army. The CFR would love to have you think Trump or anyone other than them is in charge as long as they make the decisions.

  • Pater Tenebrarum

    Central planning doesn’t get any better by being based on “rules”. That is an illusion. The only way to improve the situation would be by letting markets set interest rates without interference by a central planning agency. It’s as simple as that.

  • Thomas Waldenfels


  • Thomas Waldenfels

    Exactly. Grateful for this chance to say … Love Acting Man.

  • Wilhelm

    Better yet, get rid of the money-lending industry entirely.

  • bak2reeves

    Which would keep interest rates we pay at the high amounts they are now… From here to eternity.
    Too bad we don’t get the privilege to guess what our cost of living would be.
    Oh, those are based On Rules!!