Trump’s Win Brings New Era of Uncertainty for the Fed

Donald Trump's surprise victory could thwart rate-increase plans and put more pressure on Federal Reserve Chairwoman Janet Yellen. WSJ's Lee Hawkins explains.

The central bank has been insulated from congressional critics for the past eight years by an Obama administration that quietly supported its aggressive efforts to spur economic growth.

In Donald Trump, the Federal Reserve will face a president who has expressed varying views about its policies—supporting low interest rates some times and opposing them at others—in addition to divergent views about Fed Chairwoman Janet Yellen. 

Mr. Trump’s comments in the final days of his campaign suggested he might not feel bound by the tradition of recent presidents staying mum on monetary policy. He might also be willing to work with the GOP-controlled Congress to rewrite the laws governing the Fed’s structure and disclosures, possibly embracing proposals central bank officials have seen as threats to their policy-making independence.

The Fed has faced increasing political pressure from Capitol Hill in recent years, mainly from Republicans who complain the Fed is too opaque. But efforts to subject the central bank to greater congressional scrutiny or alter the institution’s operations have failed to advance with the Democratic White House willing to serve as the Fed’s firewall.

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Mr. Trump’s election paves the way for potential Fed changes to be signed into law. He also has the chance to completely reshape the Fed’s seven-member Board of Governors over the next 18 months, when as many as five seats could be vacant.

ENLARGE Donald Trump has said he probably wouldn't nominate Janet Yellen to continue as Fed chief after her current term expires in early 2018, and would instead prefer to tap a Republican for the job. Photo: Agence France-Presse/Getty Images

“It was fair game for a presidential candidate to talk about the impact of monetary policy and the actions of the Fed” during the campaign, said Judy Shelton, an economist and senior fellow at the Atlas Network who advises Mr. Trump on monetary policy. “He never bought the idea the Fed should be off limits,” she said Wednesday in an interview with The Wall Street Journal.

On the campaign trail, the GOP candidate described himself as being supportive of low interest rates, but later he accused the central bank and Ms. Yellen of keeping interest rates low to help President Barack Obama and, by implication, Democratic nominee Hillary Clinton.

Donald Trump campaigned on his ability to create jobs and economic success, so how could the president-elect's plans impact the U.S. economy? WSJ's Shelby Holliday explains. Photo: Getty

Moreover he accused Ms. Yellen of being “highly political,” and even featured her picture in a final campaign ad in which he railed against “global special interests.”

“We’ve heard two Donald Trumps,” said Donald Kohn, former vice chairman of the Fed and now a Brookings Institution scholar. “One said he likes low rates and he would await pretty definitive evidence of inflation before raising rates. The other Donald Trump is the one who railed against bubbles and thought the Federal Reserve was playing a political game and clearly seemed to favor higher interest rates.”

Mr. Trump has said he probably wouldn’t nominate Ms. Yellen to continue as Fed chief after her term expires in early 2018, and would instead prefer to tap a Republican for the job. Since he has criticized Ms. Yellen for holding rates low, investors might expect his pick to raise rates more aggressively.

Markets have also questioned whether Mr. Trump would ask Ms. Yellen to step down given his criticism of her. But she’s not likely to do so, nor is Mr. Trump likely to ask.

“He’s not urging her to resign at all,” Ms. Shelton said, referring to Mr. Trump’s comments that he wouldn’t reappoint the Fed chairwoman. “He’s saying he’d want someone whose thinking is more in keeping with his own.”

“I really, really don’t expect her to resign,” Mr. Kohn said. “If she did it wouldn’t be a good precedent.”

The Fed board has two vacant seats and governor Daniel Tarullo is expected to depart not long after the new administration takes over. Vice Chairman Stanley Fischer, who joined the Fed in May 2014, would likely leave the Fed when his term as vice chairman is up in mid-2018.

Ms. Yellen’s term as a member of the Fed board expires January 31, 2024, and she could stay on until then even after her term as chairwoman ends. But Fed leaders have traditionally left the central bank after stepping down from the top job.

Write to Kate Davidson at kate.davidson@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com

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