Trump arouses enormous emotions. His policies are usually widely debated. However, the recent decision passed relatively unnoticed. Bad! It’s really strange given its potential impact on the financial markets, including precious metals. So, what new is coming from Washington?
Richard Clarida, The New Vice Chair
On Monday, President Trump announced that he would nominate Richard Clarida and Michelle Bowman to the Fed’s Board of Governors. As you probably remember, there are four vacancies in the seven-member board. We have Jerome Powell as Chair, and Randal Quarles and Lael Brainard as members. Trump has recently nominated Marvin Goodfriend, but the name has stuck in the Senate. The next two nominations may significantly shape the U.S. central bank, so let’s analyze them.
Who is Richard Clarida, then? Well, he holds a Ph.D. in economics from Harvard University. He served as assistant Treasury Secretary and worked for Credit Suisse and Grossman Asset Management. Currently, Clarida is a Professor of Economics and International Affairs at Columbia University, a PIMCO’s global strategic advisor, and… a folk rock singer. Perhaps Trump likes folk rock, but we doubt whether he nominated Clarida because of a similar music taste. What was probably more important was the fact that he aligns ideologically with Powell. Clarida said once: “We believe Jerome Powell is a smart choice for Fed chair.” And he is also seen as centrist in central banking circles. That’s important as he will probably be the chief deputy for the Chair. Last but not least, Clarida would nicely complement Powell thanks to his academic background.
Fair enough, but let’s dig into his opinions on monetary policy. Clarida is mostly famous from the concept of “new neutral” he introduced in 2014. According to this view, the natural interest rates have declined after the Great Recession. It implies that in the New Neutral World, “neutral policy rates will be well below the policy rates that prevailed before the financial crisis, which in the U.S. averaged about 2% over inflation.” In plain English, it means that the federal funds rate will not increase to 4 percent, but to about 2 percent, if the Fed wants to conduct a neutral policy, i.e., neither accommodative, nor tight. Relatively low real interest rates should be fundamentally positive for gold, a non-bearing interest asset.
Michelle Bowman – Another New Team Member
And who is Michelle Bowman? She earned a Juris Doctorate from the Washburn University School of Law in Topeka. Bowman formerly worked for Farmers & Drovers bank and for former U.S. Sen Bob Dole. She also served at the Federal Emergency Management Agency, as investigative attorney for the House Committee on Government Reform and Oversight, and as counsel for the House Committee on Transportation and Infrastructure.
Now, Bowman is the Kansas State Bank Commissioner. This is actually why Trump wants to nominate her – Bowman is expected to fill a position at the Fed reserved for someone with community banking experience. She is expected to be light-touch on regulations, but she has very little public record of expressing views on monetary policy. So it is safe to assume that Bowman will also be a centrist in the board. If we are right, gold shouldn’t react strongly to her nomination.
Implications for Gold
President Trump announced two next nominations to the Federal Reserve Board of Governors. Richard Clarida seems to also support the gradual tightening of Yellen and Powell. So, his nomination shouldn’t importantly shake the gold market. The Fed will continue the interest rate hikes, but to a level lower than what was the norm before the financial crisis. Bowman is a mystery, but she will probably be a centrist.
Another important change among the FOMC is the selection of John Williams as the next head of the bank’s powerful New York branch. He has recently said that the inflation would reach the target of 2 percent this year and stay at or above that level for another couple of years. So although we will probably not see a revolution, a slightly more hawkish FOMC is coming. The Fed is now turning from being accommodative to being neutral. The new neutral is perhaps lower, but, hey, its estimation may increase. And the Fed could change its stance from being neutral to being tight when inflation accelerates one day.
Not surprisingly, Trump picked up just another two well-qualified Republicans who are industry-friendly. Their deregulatory bias should support the financial sector and put downward pressure on the precious metals market. However, in the long run, their liberalization could sow the seeds of another crisis, which would be, of course, positive for such save-havens as gold. Do not forget about tail risks – in the short run, the nominations should provide continuity, but in the long run… Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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