Fed Put On Watch By Congressional Vice Chairman Of Financial Services

The chances of a rate hike in March has fallen from 17.7% to 13.3% and the chances of zero rate hikes this year has risen to 6.9%. Besides Trump’s rhetoric, the lack of hawkishness by the Fed is also hurting the dollar. The market participants always convince themselves that this year will finally be the one where the Fed follows through on this initial projections for a few rate hikes. Steve Liesman mentioned that the Fed may start discussing shrinking the balance sheet in mind-2018. These types of projections are always pushed out far enough that they can be delayed without anyone noticing.

Keep in mind, all of my projections above are based off of the current Fed, but can immediately be changed after Trump appoints two new governors and possibly changes the Fed chairperson next year. This brings me to the biggest news on the monetary policy front since Trump was elected. Today it was reported that Patrick McHenry, Vice Chairman of the Financial Services Committee, wrote Janet Yellen a strongly worded letter. I have a screengrab of the letter below.

While Trump didn’t write this letter, it is in coordination with the White House’s thoughts on the Federal Reserve. There wasn’t a letter like this when George Bush was president because he wasn’t critical of the Fed like Trump is. The Federal Reserve is supposed to be apolitical. However, it hasn’t been apolitical for as long as I’ve been following it. This aggressive stance is similar to previous executive branches’ policies regarding the Fed. The difference this time is it is public and blunt.

One signal that the Trump administration would take a harsh tone with bureaucrats was his firing of Sally Yates, the attorney general, when she didn’t enforce the temporary travel ban. Therefore, it’s not a surprise when an Obama pick doesn’t follow his ethos, he will have a strong negative reaction. I don’t expect any major reaction such as Trump firing Yellen because she isn’t directly going against any of his polices. He hasn’t done any executive actions on monetary policy, so it’s not as if Yellen is defying his plans.