Policy Burns

Weekly Updates

Markets have speculated about the possible identity of US President Trump’s chosen successor to Federal Reserve Chair Powell. With Trump very willing to demand interest rate changes, investors are concerned about Fed independence.
Markets would be most relieved with a truly independent Fed chair—someone who is not influenced by political views and sets policy in accordance with the Fed’s mandate. A chair in the tradition of Volcker, Greenspan, Bernanke, and Yellen would reassure markets about policy quality.
A political puppet could, ironically, be market positive. Someone who was obviously beholden to the president’s views may limit their influence at the Fed. It is a convention, not a rule, that the Fed chair drives policy. The FOMC may defy an obvious political puppet and vote against the wishes of the chair (and president).
The biggest market threat may be a modern equivalent of US President Nixon’s Fed Chair Burns. Nixon pressured Burns to be his mouthpiece at the Fed, and Burns in turn pushed the president’s preferred policy (rate cuts). However, Burns was not an obvious political puppet, and therefore wasn't sidelined by other Fed members. Investors should worry about a Fed chair who is open to political pressure without being a stooge that their colleagues decide to ignore.