Federal Reserve Chair Janet Yellen should be "ashamed of herself" for keeping interest rates low and creating a "false stock market," President Donald Trump said on the campaign trail last September. It's safe to assume that when Yellen's current tenure is up on February 3, 2018 Trump won't be offering her a second term.
Who Is Trump's pick for Fed Chair?
#Fed #Yellen #TaylorRule
The speculation about who will replace Yellen is heating up. Hedgeye Senior Macro analyst Darius Dale has a few ideas in this morning's Early Look. We won't give you the whole run-down but one of the likely candidates is influential Stanford economics professor John Taylor.
Taylor has been a vocal critic of the Fed and is widely acclaimed for the "Taylor Rule." We'll spare you the details crafted in the hallowed halls of academia. Essentially, the Taylor rule is a formula that prescribes the proper interest rate so that an economy can operate at maximum employment, inflation and GDP.
Taylor is a true believer in monetary policy rules. "Had the Fed not deviated from rules-based policy before the [2008 financial] crisis, unemployment would not have increased so much," Taylor wrote recently.
What Does this mean for Investors
If the Fed enacts a rules-based monetary policy, this would mark a fundamental shift from current easy money policies. As Dale writes this morning, "We can’t stress enough how much of a hawkish shift in policy that would represent."
The Chart of the Day below shows what the Taylor rule suggests for current and future interest rates. Way below the Taylor rule's prescribed rate (the red line) is the Fed's dot plot (each member's estimated policy rate, with the black line representing the median rate).
Take a look. "Needless to say, we don’t think market participants are prepared for a 4% Federal Funds rate by year-end 2018," Dale writes.