3 Reasons Why Trump Must Keep Janet Yellen as Federal Reserve Chair

Listen up, Mr. President!
By Scott Gamm ,

President Donald Trump should renew Federal Reserve Chair Janet Yellen's term when it expires early next year.

First, the President, who loves to tweet about the rising stock market, has Yellen to thank.

She has been great for the stock market.

The S&P 500 is up 40% since February 3, 2014, the day Yellen was sworn in.

Yellen maintained her predecessor's zero interest rate policy. Despite calls for Yellen to raise interest rates sooner, especially in the latter part of 2015 when the economy grew 5%, Yellen maintained her dovish, market-friendly stance and didn't pull the trigger until December 2015. That was the first rate hike since 2008.

Her subsequent rate rises have been gradual, to steal a term central bankers love to use. The next one came a year later in December 2016, with two additional ones in 2017.

While Yellen ended the Fed's quantitative easing program in 2014, the stimulus remained alive and well as the Fed reinvested maturing bonds into new bonds to maintain the size of its $4.5 trillion balance sheet.

  • Don't Ever Forget the Pain: Federal Reserve Chair Janet Yellen

Only in 2017 has the Fed started to prep markets for the unwinding of its holdings, which could add to stock market volatility. The wave of quantitative easing since the financial crisis crushed returns on other assets like bonds, pushing yield-hungry investors into the stock market.

Still, in the Fed's June statement, the markets were told the unwinding process would "gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities."

Again, even for a hawkish move like trimming the Fed's assets, Yellen is expected to go about the process in a dovish way.

The Fed said in June that only $10 billion worth of securities would roll off the Fed's books per month during the initial stages of the unwinding process. That's nothing to cry over.

On the day this news crossed, June 14, the S&P 500 only fell 0.10%.

The second reason why Trump should keep Yellen is because any change in the Fed chairmanship, even if her successor is widely viewed as positive for the markets, is an uncertainty for investors.

"I would bet that [Trump] renominates her," said Timothy Anderson, managing director at TJM Investments. "The market hates uncertainty and any new Fed Chairman regardless of how much deep experience they have either in the economy or the inner workings of the Fed, there are always a few hiccups during their first six to eight months."

Trump hasn't notched any major policy wins in his time in the White House, but the stock market is up 7.4% since his January 20 inauguration. Trump wouldn't want to disrupt that trend.

Finally, loyalty matters to President Trump.

Mark Zandi, chief economist at Moody's Analytics told TheStreet in late July that he thinks President Trump wants his own person running the Fed.

On July 11, Politico reported that National Economic Council Director Gary Cohn, and former Goldman Sachs GS President, is Trump's top candidate to succeed Yellen.

After Trump's delayed denouncement of white supremacists at the August Charlottesville protests, Cohn drafted a letter of resignation, according to The New York Times.

But Cohn didn't resign and told the following to the Financial Times on Friday: "As a Jewish American, I will not allow neo-Nazis ranting "Jews will not replace us" to cause this Jew to leave his job.

Still, the mere notion of Cohn drafting a resignation letter, even without pulling the trigger and resigning, may in Trump's mind, raise questions about his overall loyalty to the President.

Then again, the fate of Janet Yellen and Gary Cohn likely lies in a single tweet from @realDonaldTrump, who thrives on unpredictability.

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