Fed Chair Janet Yellen`s job is coming to an end. She took over the job from Ben Bernanke who started to «print» money. Four years is over and President Donald Trump have a few but strong candidates on his table.
President Donald Trump had a meeting with Standford University economist John Taylor and according to a White House official, Mr Trump is nearing a decision on whom to pick to lead the Federal Reserve.
John Taylor is one of the candidates and Janet Yellen is the other one. Other candidates are Fed governor Kevin Warsh who is on Trumps shortlist. Current governor Jerome Powell and Trumps economic adviser Gary Cohn is also on the list.
Mr Trump has scheduled a meeting with Federal Reserve Chairwoman Janet Yellen on Thursday.
Ms Yellen`s four-year term as chairwoman expires on February next year and Mr Trump will meet her to discuss the possibility of nominating her for a second term as central-bank chief. Mr Trump is considering offering Yellen the chance to stay in the job, but will announce his nominee before leaving for a trip to Asia next month on November 3.
John Taylor said he agree with the Fed`s strategy to remove economic stimulus, and the Fed policy rate is now set at 1 percent to 1,25 percent. What the right thing to do about the rate is a matter of debate among economists, also among Taylor and his camp.
John Taylor is a Ph.D economist with a strong expertise in monetary policy and institutional leadership which is key attributes for the Fed Chair, and this is probably why Taylor is one of the biggest favorite for Mr Trump.
Donald Trump is planning to cut the taxes and monetary policy is therefore critical and important.
Former Fed Chair Ben Bernanke started the QE program after the financial crisis in 2008, and Fed governor Warsh was against further monetary stimulus in 2010 with unemployment above 9 percent and inflation decelerating.
Ben Bernanke is an expert on the stock market crash in 1929, and called Warch`s political and markets savvy «invaluable,» according to Bloomberg.
Central banks are often independent from other policy makers. This is the case with the Federal Reserve and Congress, reflecting the separation of monetary policy from fiscal policy and the latter refers to taxes and government borrowing and spending.
The Federal Reserve has what is commonly referred to as a «dual mandate»:
- to achieve maximum employment (around 5 percent unemployment), and
- stable prices (2-3 percent inflation).
In addition, it aims to keep long-term interest rates relatively low, and since 2009 has served as a bank regulator. Its core role is to be the lender of last resort, providing banks with liquidity in order to prevent the bank failure and panics.
The central bank of the United States is the Federal Reserve System, which Congress established with the 1913 Federal Reserve Act.
Central banks are inherently non-market-based or even anticompetitive institutions. Many central banks, including the Fed, are not government agencies, and so are often touted as being politically independent.
Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.
There are two types of monetary policy; expansionary and contractionary.
Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth.
Contractionary monetary policy slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation, while sometimes necessary, contractionary monetary policy can slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses.
An example would be the Fedral Reserves intervention in the early 1980s: in order to curb inflation of nearly 15 percent , the Fed raised its benchmark interest rate to 20 percent.
This hike resulted in a recession, but did keep spiraling inflation in check.
Mr Trump is planning to cut taxes and build more and better highways, and this is fiscal policy, which is trying to control inflation, stabilize business cycles and to improve unemployment rate. Sooner or later, we all know that the recession will come.
The tools will then be fiscal policy and the government will start to lower tax rates to try to fuel economic growth. If people are paying less in taxes, they have more money to spend or invest, and increased consumer spending or investment could improve economic growth.
On the other side; too much spending could increase inflation.
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