DEBATE: Will Janet Yellen’s departure from the Federal Reserve signal a shift in US monetary policy?

Will Janet Yellen’s departure from the Federal Reserve signal a shift in US monetary policy?

Vicky Pryce, CEBR board member and former joint head of the Government Economic Service, says YES.

Janet Yellen stepped down last Saturday after having headed the Federal Reserve for the past four years – the first woman to have ever done so. She took small cautious steps, always with an eye to the real economy.

And she was right. Despite all the fanfare since the election of President Trump, GDP in 2017 in the end grew by a relatively modest 2.3 per cent, slightly less that the Eurozone as a whole. And although she initiated the beginning of what will be a tapering of quantitative easing, she was mindful not to destabilise the markets.

Her replacement Jerome Powell is generally perceived to be dovish, but circumstances are changing. The talk is all now of considerably faster growth this year, as the announced tax cuts and greater infrastructure spending find their way into the economy, which are likely to add to inflationary pressures at a time of near full employment.

So expect a faster move away from unconventional monetary policy with greater use of rate hikes from here on.

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Bryn Jones, head of fixed income at Rathbones, says NO.

There will likely be no short-term changes. Under Janet Yellen’s replacement, Jerome Powell, the Fed will probably continue on a steady path of tightening to ward off excesses building from the low rates of the last decade, while at the same time trying not to upset the apple cart – if rates go up too quickly, higher borrowing costs could squeeze consumers. Lessened spending would combine with higher interest expense to create a double whammy for company earnings: lower revenue and higher costs.

Donald Trump’s tax cut could lead to more companies dishing out bonuses and higher pay, like Walmart and others. Powell is the first untrained economist to take the Fed chair in decades. However, he was a Fed governor for five years, and has worked alongside Yellen and with former chair Ben Bernanke, so he is well-versed in the machinations of Fed policy.

With all this in mind, we had three or four 0.25 per cent hikes pencilled in this year in the US. With Powell at the helm, our view is unchanged.

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