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‘You’re fired!’ Fed chair Janet Yellen is on borrowed time with Trump

The Federal Reserve chair may find herself first in the firing line as President-elect Trump prepares to launch his infrastructure spending spree

PUBLISHED : Wednesday, 16 November, 2016, 10:00am
UPDATED : Wednesday, 16 November, 2016, 10:32pm

“Do you know what? You’re Fired!” That catchphrase from a second-rate reality TV show is likely to ring in the ears of a number of important people from the president-elect.

None more so than Janet Yellen, chairman of the Federal Reserve Board, which is responsible for setting our interest rates.

The position of the chairman is of course not in the president’s gift. But firing people is Trump’s special skill. He will find a way, as she doesn’t seem to be his type.

Janet Yellen has not provided the necessary leadership, blindly following the soft money policies of her predecessors

The kind of people that Trump is choosing for his key appointments are (quite rightly) those on whom he relied to win the election. Most were on the fringe of the establishment; damaged goods, with careers blemished in some way but able to get a foothold because of Trump’s apparently unwinnable prospects.

They include Chris Christie (the man who closed the George Washington Bridge to punish a political opponent), Newt Gingrich (who as House Speaker provided false information to the House Ethics Committee) and Rudi Guiliani (who cleaned up New York only to be laid low by illness and a complex private life). They will bring a record of failure into the Cabinet.

The economy is critical to Trump because the campaign promises that were in part believable, were about making the life of the ordinary, working-class American better. It is an irony that as a Republican, he stole the clothes of the Democrats – and that, of course, is why he won.

The man likely to lead economic policy is Steve Mnuchin who is proposed as Treasury Secretary. He looks very untried. After a half career at Goldman Sachs (he followed daddy’s glittering career with less glitter) he has since invested the family silver in film and finance ventures – none of them a wild success. His best investment, however, was to become one of the few friends of President-elect Trump who knew anything about money – ideal qualifications for a Treasury Secretary, in the circumstances. What a Goldman alumnus knows about assisting Trump’s new blue-collar rust belt supporters remains to be seen.

This administration will be a spending one, building roads and railways in a throwback to hard-core Keynesian economics

These voters care mainly about how to get an extra dollar in their pockets and will flip to vote for the next person who promises to give it. So the administration is likely to be a strange synthesis of Republican politics and Democratic spending.

Today’s Republicans are more interested in keeping powerful guns in the hands of lunatics, limiting abortion, and tax cuts, than in the budget deficit.

This administration will be a spending one, building roads and railways in a throwback to hard-core Keynesian economics. Yet Keynesianism, plus a dose of tax reform, might be popular with both parties and a Trump vote-winner in the next election. Trump could even sensibly cut US taxes if the code were simplified and the wealthy paid their fair share.

The sweet spot of Trump’s appointments is of course the Supreme Court but, for economists, the Fed lies a close second. Janet Yellen has not provided the necessary leadership, blindly following the soft money policies of her predecessors. Interest rates are now so low that most of the macroeconomic relationships on which policy has depended since the Great Depression of the 1930’s have broken down.

Expect a Santa rally this year, driven by the most left wing, right wing, socialist president in history

GDP growth is supposed to relate to interest rates. It doesn’t. This is the relationship that Yellen and the White House were relying on to stimulate the economy – but with rates below 2 per cent, the relationship doesn’t work. Money supply bears no relation to inflation. That used to be one of the key mantras of economic management. Not any more. Countries with weak currency are supposed to see inflation rise. The UK is still waiting for any real inflation after the pound fell 26 per cent in a year. The constant prevarication about whether interest rates are going up or not and the sheer ill discipline of the Fed governors in giving frequent and contrary views has been very damaging to the Fed’s credibility. Janet, you’re fired!

Trump’s tactic will be to build walls and railways because he needs to spend to continue to hold onto his working class support. This is great for equity markets - and especially for China, as a growing US will suck in imports. Expect a Santa rally this year, driven by the most left wing, right wing, socialist president in history.

Richard Harris is an investment manager, writer and broadcaster – and has lived in Hong Kong for nearly half a century. www.portshelter.com

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