President Donald Trump hinted for the first time that he’s open to keeping Janet Yellen at the helm of the Federal Reserve.
For markets trying to predict the future of monetary policy, that’s a change of heart that suggests continuity during an era of disruption in Washington.
“I do like a low-interest rate policy, I must be honest with you,” Trump said, according to a Wall Street Journal report on Wednesday. Of Yellen, he said “I like her, I respect her,” though “it’s very early.”
Those comments mark a reversal in Trump’s position on the campaign trail, when he said he would replace the 70-year-old Fed chair and called her “political” for keeping rates low. Yellen’s term as leader expires in February, so the president has several months to make up his mind. Still, his openness to the status quo suggests that if he nominates someone else, it could be someone with a similar philosophy about monetary policy.
“It shows the market that he’s a little more open-minded to a more dovish approach,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York. He said that Trump’s remarks in the interview increase the probability that Yellen stays to 25 percent, from 5 percent Tuesday. “It’s still not a high probability, but it has moved the odds.”
If Yellen does stay in office, that would allow for continuity at the Fed during a crucial — even unprecedented — time for monetary policy. The central bank is in the process of deciding the strategy for unwinding its $4.5 trillion balance sheet. It plans on releasing a framework for how it will do that, probably later this year.
“It would give me more confidence that whatever is put in place for the balance sheet would be likely to stay,” said Steven Friedman, senior economist at BNP Paribas Investment Partners in New York.
Trump already has three open slots to fill on the Federal Reserve’s Board of Governors, and Vice Chair Stanley Fischer’s term will expire in June 2018.
Even if Yellen isn’t retained, a more dovish or centrist Fed nominee would enable the central bank to stay on its current path of gradually raising rates as the economy improves. Yellen has presided over the slow removal of accommodation after a record run of extremely low rates, and has often been criticized in Congress for her dovish stance on policy.
“I’m a little more comfortable with continuity,” said Friedman, who nevertheless thinks Trump is likely to nominate a new Fed leader. The president has promised big fiscal spending, which would be more effective if it isn’t offset by much-higher interest rates. “His ‘Make America Great’ economic agenda would be better served by accommodative monetary policy.”
If Yellen is renominated, there’s always the question of whether she would be re-confirmed by Congress. Leading Republican lawmakers have been critical of her. Still, her recent policy moves have been hawkish and that could placate some, said Thomas Costerg, senior U.S. economist at Standard Chartered Bank in New York.
“Bottom line is: There is a scenario in which Yellen might stay as acting chair, and that scenario is rising,” Costerg said, who thinks it’s “inching towards” a two-thirds probability that Trump would put her name forward. “Yellen is ticking the right boxes.”