She is the chair of the US Federal Reserve, one of the most powerful women in the world. He is the President of the United States, and some might he is also quite powerful. Is that a clash which is brewing?It should come as no surprise. During his presidential campaign, Donald Trump was ultra-critical of the Fed chair Janet Yellen. From Ms Yellen, we have had far more subtle comments about how some members of the Fed’s rate-setting committee, the FOMC, have been reflecting economic uncertainty when casting their votes on monetary policy.
But yesterday, Ms Yellen was speaking at a Congressional hearing.
The Fed chair did not go for was Trump bashing, as such. In fact, she was sort of positive over plans to rein back on banking regulation, saying: “I certainly do agree with the core principles. They enunciate very important goals for our financial system and supervision and regulation of it.” and she talked about the need for regulation to be “efficient, effective, and appropriately tailored.”
But then again, President Trump’s plans to radically water down Dodd Frank, the financial regulation act that President Obama’s administration brought in during the aftermath of the 2008 crash, don’t seem to be going down that well with Ms Yellen.
It’s the fashion in Wall Street to say that Dodd Frank has held back the US recovery, made it harder for banks to lend. But the jury is out on how much of this is true. And yesterday, Ms Yellen pointed out that US lending has been expanding and that US banks have seen a stronger performance than European banks. Indeed, investors who are bullish on the US economy, often cite the strength of the US banking sector to support their case. So, whether Dodd Frank is quite the evil, that many are claiming it to be, is debatable.
But Ms Yellen’s bigger question mark relates to President Trump’s plans to cut taxes and massively increase investment into infrastructure.
She was subtle. But then central bankers are. The Fed chair before the last one, Alan Greenspan, was so subtle in his pronouncements, that he once said that “if you think I am making myself clear you have probably misunderstood me.”
Ms Yellen will never put it simply. Rather than saying something is not a good idea, she is the type to say that the ‘weight of evidence suggests that the intended course, on the scale of probability, does not favour an outcome that is consistent with what might be considered optimal.’
And yesterday, while discussing the Trump plans she said there was “considerable uncertainty” on the economic outlook.
There, she said it. The kind of warning that is akin to whispering very quietly as a speeding car drives past, you, “I suggest you slow down or you may have an accident.”
Even so, there is talk of a huge division between the White House and the Fed.
Oddly, the new Treasury Secretary, Steven Mnuchin is reportedly a supporter of Yellen.
Ms Yellen’s first term as Fed Chair only has one year left to run. To use the kind of language that the Fed uses, one could say that, based on current indications, the possibility of the current chair not serving a second term is not remote.”
And yet, look through the 'who said what’, and the ‘double negatives’ and ‘hints wrapped in eggs shells’, and ‘enigmas masquerading as certainties’, right now the US economy looks strong.
Later today we will get the latest data on US inflation, and that may tell us a lot. US inflation may pose a kind of speed limit on the extent to which Trumponomics can be implanted without rapidly increasing interest rates.
US inflation has been rising, but so far, core inflation, that’s excluding food and energy, and is the measure that the Fed tends to put more emphasis on, has been pretty flat for over two years. For as long as it stays that way, hikes in US rates are likely to be modest.
Will core inflation continue to stay at a level that the Fed might call contained? If so, then the considerable uncertainty looks a little less uncertain.