This post was originally published on Zero Hedge.
The Federal Reserve can make or break a president.
Monetary policy influences all financial markets as well as the cycles in the economy. No president wants to have to run for re-election when the stock market and economy are turning down.
Recall that President George H.W. Bush was sitting on sky-high job approval numbers in 1991 and was expected to coast to victory in his 1992 re-election bid. But then the economy swooned toward recession, giving Bill Clinton the opening he needed.
Bush later blamed Federal Reserve chairman Alan Greenspan for his defeat. Greenspan had held interest rates too high for too long, Bush complained.
On the campaign trail in 2016, Donald Trump complained that Fed chair Janet Yellen was trying to help Hillary Clinton by keeping rates near zero and pumping up the stock market with liquidity.
“They’re keeping the rates artificially low so that Obama can go out and play golf in January and say that he did a good job… It’s a very false economy,” Trump told reporters in September 2016.
Later that month in the second presidential debate, he declared, “We are in a big, fat, ugly bubble. . . The only thing that looks good is the stock market. But if you raise interest rates even a little bit, that’s going to come crashing down.”
Reappointing Janet Yellen Could Be Politically Dangerous to Trump
Now that he’s president, Trump may have become the stock market bubble’s most high-profile cheerleader. He certainly doesn’t want it to burst on his watch.
The president has warmed up to Yellen’s Dow-friendly easy money policies. He even suggested he might reappoint her to the Federal Reserve in early 2018.
That would be a politically dangerous move. The Fed could help determine which party has the advantage in the 2018 mid-terms and the 2020 presidential election beyond that.
Of course, Fed officials insist they are “data driven” and don’t make policy decisions based on politics. Whether they intend to be or not, Fed policymakers are inevitably involved in politics. The members of the Federal Reserve Board are political appointees.
Yellen is a liberal Democrat, appointed by President Obama. She understands what’s at stake in the upcoming elections. She understands that Democrats are in a state of political desperation right now. They hold only 15 governorships, are a minority in Congress, and stand to be steadily replaced in the courts. But they STILL control the Federal Reserve Board.
President Trump now has the opportunity to re-shape the Fed. Three of the seven positions on the Federal Reserve Board remain vacant. Trump can fill them. More importantly, he can replace Yellen as Fed chair next year.
Fed Moves Could Crash the Stock Market, Hurting Republicans in 2018
It’s understandable that Trump is playing nice with Yellen while she’s helping keep things seemingly peachy keen in the markets. But the consequences of the Fed’s balance sheet “normalization” program may start to be fully felt next year. He shouldn’t underestimate the risks of the bubble he identified in 2016 bursting in time for the elections in 2018.
This year’s mid-terms will be of particular concern to Fed officials. Republicans have a shot at expanding their majority in the Senate and finally being able to pass conservative legislation – including potentially an audit and reforms of the Federal Reserve system.
In recent years, GOP reformers in Congress have pushed bills that would force the Fed to adhere to a rules-based formula for setting its target interest rate. That would help remove political conflicts of interest from policy decisions and make them less impactful on markets.
Right now, any major monetary reform efforts would be met with insurmountable resistance by the keepers of the center-left status quo in the U.S. Senate. Yes, despite Republicans having a nominal majority in the Senate, conservatives are in the minority. That became abundantly clear when a pair of liberal Republicans joined anti-Trump establishmentarian John McCain in voting to save Obamacare from being repealed.
Trump’s Priorities to Be Stymied Unless GOP Gains Seats
It’s likely that none of Trump’s legislative priorities – from healthcare, to immigration, to taxes – will ever make it to his desk to become law. Unless conservative/libertarian-leaning Republicans hold onto the House and gain some Senate seats in 2018.
Mid-terms typically result in net losses for the party that controls the White House. Democrats might be feeling good about their odds of winning back full control of the Senate… except for the fact they face a big structural disadvantage this time around.
Democrats must defend 25 Senate seats in 2018, while Republicans only have to put 9 on the line. GOP strategists see an opportunity to expand their majority by knocking off vulnerable Democrat incumbents in Indiana, Missouri, Montana, North Dakota, and West Virginia – states that swung heavily for Trump in 2016.
The question is: Will the economic backdrop be favorable for Republicans to campaign on the Trump agenda? That remains to be seen.
Given the stakes, Donald Trump’s hiring decisions at the Fed could make or break his presidency.
This post was originally published on Zero Hedge.