Friday, September 08, 2017

Fed onward, Feb onwards

Courtesy: My thought piece published in IIFL Wealth Market Xpress

With Fed Chair Janet Yellen’s four-year term formally ending in Feb 2018, speculation is rife over her prospective successor. The bigger question, however, is whether Trump’s ultimate choice would help the Fed reinforce its credibility as the world’s premier central bank.

Sudhir Raikar

Ever since President Trump named Gary Cohn, his chief economic advisor and former Goldman Sachs luminary, as one of the likely candidates for the Fed top post, observers and experts are theoretically listing out pros and cons of having Cohn at the helm of the country’s central banking system. Though Trump’s short list comprises a few other contenders, including Yellen for a possible reappointment given his new-found respect for being a ‘historically low-interest person’, the name of Cohn is in furious circulation. In striking contrast, recent reports that he’s leaving the White House, miffed with Trump over the press conference following the Charlottesville violence, are also doing the rounds. The White House has rubbished the prophecies as being baseless and untrue, stating that Cohn remains staunchly focused on his job as the NEC director.

Whether Cohn stays at the White House or not, whether he takes charge of the Fed or not, his life story reads like a silver screen blockbuster plot. A dyslexic of humble beginnings, he sold window frames and aluminium sidings on weekdays while steering an undying passion for financial markets on weekends. A chance conversation with a commodity exchange trader en route a cab ride to the airport opened the prospect of making it big in the uncharted territories of Options Trading. Cohn knew nothing about Options till that point but cleared the litmus test in convincing fashion, courtesy Lawrence G. McMillan's "Options as a Strategic Investment".

He never looked back ever since. Thanks to his razor-sharp intellect and never say die spirit, he rose from strength to strength in strikingly offbeat fashion and went on to become president and COO of the legendary Goldman Sachs, sans the default passport of an Ivy League background. If he does make it to the Fed, this would be without the customary Ph. D in economics. In many ways, Cohn would be an alien at the Fed office, much like Trump is at the White House, as both bring their distinct brands of corporate bluntness to the governance table. Opinion is largely divided on his Fed appositeness though.

His backers find him tailored for the role, a compulsive doer who would usher in the much-needed trading floor aggression to the Fed’s conference room, known for its stoic consensus-driven contemplation seeped in economic conjectures. He has already left his indelible mark at the White House. Entrusted with the task of reforming the US tax code and reimagining US infra priorities, he’s known to speak his mind, and his fearless candour is diametrically opposed to the measured White House diplomacy. His fierce pro-global stand on trade restrictions or even the failed attempt to dissuade Trump against withdrawing from the Paris Agreement bear ample testimony. It seems highly unlikely that he would become Trump’s man or even a ‘Goldman’ in deciding the course of the nation's economy as the Fed chief.

And then there are others who find him wholly unqualified for the emblematic Fed cause. They argue he would push the need for a weak currency as a silver bullet stimulant for economic growth and necessarily look at every policy from the slender viewpoint of financial markets, which would likely make the supposedly apolitical Fed an unmindful bailout machine all over again. Cohn, in his Goldman Sachs avatar, had condemned the Fed for confusing the markets, injecting liquidity into the system on one end and advising banks to be wary of lending on the other. Having said that, what he would do as the Fed Chief is another story.
The nation-wide deliberation on the new Fed chief – going by the coveted opinion polls and surveys – seems knowingly or unknowingly centred on politics and personalities. It should instead be focused on likely market outcomes: what would the differing perspectives of different probables mean for the Fed? Would they help make the institution more relevant to the US (and the world) or would they leave it even more obscure over time?

For long, the Fed has, or for that matter most central banks across the globe have, upheld rather theoretical notions about the largely imagined ‘desired’ economic effects of low interest rates, quantitative easing programmes and bond roll-offs. If financial markets have been stable for quite some time now, how much of it can be attributed to Fed’s reading of inflation and full employment, no one can tell with certainty. And this is not to take away anything from the Fed’s regulatory and supervisory credibility. Going forward, the Fed’s challenges would only get more complex, especially in the light of growing geo-political tensions across the globe as also looming fear of economic downturns, purely going by the law of averages. Sound advice on what the Fed should be doing is abundant even within the Fed community. Ask Neil Kashkari, Federal Reserve Bank of Minneapolis President about the virtues of waiting for discernible signs of wage and price pressures before opting for rate hikes or his predecessor Narayana Kocherlakota who firmly believes monetary policymakers need to rely less on set rules and more on discretion to ensure better outcomes.

Given the Fed’s hardcoded fixation with unemployment rates, it will take someone persuasively pragmatic to steer the monetary policy in a way that doesn’t overreact to the fears of rising inflation levels or the risk of evolving asset bubbles. Whether that someone would be Cohn or Yellen, or for that matter former Fed guv Kevin Warsh, Columbia professor Glenn Hubbard or Stanford academician John Taylor, why and how should it matter?