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The future of the Fed, regulation and the impact on global banking

City Lectures and Launches | Thu 20 Apr 2017

Fed independence ‘pressure’ over Trump growth plans

The gap between President Donald Trump’s optimistic plans for 4% US growth and the Federal Reserve’s much more sober assessments will put pressure on the Fed’s independence, since Trump will wish the central bank to run a lax monetary policy to boost the economy. That was a major conclusion of a panel discussion in Washington on international economic policy under the new administration, organised by OMFIF and McKinsey Global Institute.

The White House website is still maintaining that the US can achieve 4% economic expansion under Trump, about twice as high as the trend American growth rate repeatedly suggested by Federal Reserve officials in the past few months. They claim that low US productivity growth and a slowdown of entrants to the labour market – likely to be exacerbated by Trump’s policies restricting immigration – will damp potential expansion to well below the president’s expectations.

Sebastian Mallaby, a monetary expert at the US Council on Foreign Relations, author of a best-selling biography of Alan Greenspan, the former Fed chairman, said the Fed was ‘vulnerable’ especially since Trump has the power in coming months to introduce at least three appointees to the board of governors. Mallaby cited past experience of President George H. Bush waging a ‘vicious fight’ against Greenspan, Richard Nixon’s pressurising of Arthur Burns in the 1970s, and Lyndon Johnson’s browbeating of William McChesney Martin in the 1960s.

However, Mallaby termed as ‘a good thing’ Trump’s rumoured plans to nominate Randal ‘Randy’ Quarles, a senior Treasury official in the Bush administration, now heading a US investment firm, as the Federal Reserve’s top banking regulator.

Prof. Meghnad Desai, chairman of OMFIF’s Advisers Network and emeritus professor of economics at the London School of Economics and Political Science, said it was time for ‘new debate’ on central banking autonomy now that a shift to more expansive fiscal policy around the world was raising the likelihood of higher interest rates.

Nathan Sheets, a former senior Treasury official under President Barack Obama, now at the Peterson Institute for International Economics, said he couldn’t remember a time when so many constituents of the Fed board were up for change or renewal. Trump ‘has an opportunity to put his signature on the Fed’, he said. However regional central bank presidents on the policy-making Federal Open Market Committee provided a ‘sense of continuity’. He added that Janet Yellen, whose four-year term as Fed chair ends in February, would regard as a token of success that she should not ‘cave in to political pressure’.

Adair Turner, former head of the UK Financial Services Authority, now chairman of the Institute for New Economic Thinking, said the spurt in word growth reflected ‘a slightly more relaxed fiscal stance around the world’, facilitated by ‘years of massive monetary stimulus’. He said much of government debt – especially in Japan – had effectively been monetised, but he saw no general ‘invasion of central banking independence’.

 

The future of the Fed, regulation and the impact on global banking

OMFIF and McKinsey Global Institute convened a panel of speakers  to explore the effects of monetary policy and regulation on cross border capital flows in the era of Trump and Brexit. The potential for slowing trade and impact on current account deficits were also discussed. 

Keynote: 
Lord (Meghnad) Desai, Professor Emeritus, London School of Economics; Chairman, OMFIF Advisory Council

Presentation: 
Susan Lund, Partner, McKinsey Global Institute, on MGI's latest findings on financial de-globalisation

Panellists:
Sebastian Mallaby, Member, Council on Foreign Relations
Nathan Sheets, Visiting Fellow, Peterson Institute for International Economics
Lord (Adair) Turner, Chairman, Institute for New Economic Thinking
Laura Tyson, Distinguished Professor of the Graduate School at the Haas School of Business, University of California, Berkeley

Moderator:
David Marsh, Managing Director, OMFIF