With vacancies, Trump gains chance to reshape U.S. Fed

WASHINGTON DC, USA – US President Donald Trump's influence over the US central bank may grow significantly following the resignation of a Federal Reserve governor who helped drive banking regulation following the 2008 financial crisis.

Daniel Tarullo, who announced his resignation on Friday, February 10 – nearly 5 years before the end of the term he was appointed to by former President Barack Obama – was an architect of efforts to shore up capital held by banks to help them weather financial storms.

The new Trump era is seeing Washington begin to shed regulations in bulk. 

The president has pledged to loosen up capital markets regulation, this month ordering a review of the 2010 Dodd-Frank financial reform legislation with an eye to undoing substantial parts of it.

All of this means Tarullo's departure could come at a key moment.

It is the central bank that sets capital standards, approves bank dividends and creates the scenarios for the stress tests that banks must undergo. 

Only Congress can revise the Dodd-Frank legislation, but it is now a Republican-controlled Congress working with a Republican president.

'Most consequential figure'

Ian Katz, director of Capital Alpha Partners, said it is difficult to overstate the role Tarullo played in banking oversight after the crisis.

Tarullo "was the most consequential figure in financial regulation in the Dodd-Frank era and we can't even think of who would be in second place," Katz said in a note to clients.

Nevertheless, Tarullo said he had planned to retire before the world learned in November of Trump's election victory. His resignation is effective around April 5.

Tarullo's departure brings to three the number of vacancies on the Fed's board of governors that Trump now has the chance to fill.

In addition, he will be able to name a new Fed chair to replace Janet Yellen when her term expires in February 2018.

"This a substantial part of the board that can be flipped over pretty quickly," said Tim Duy, an economist and close Fed observer at the University of Oregon.

"That has implications for how quickly Trump can make this his Federal Reserve but we still don't have much an indication of what that would mean to Donald Trump."

David Wessel, a senior fellow in economics at the Brookings Institution, said Trump was likely to favor appointing someone more sensitive to the wishes of industry.

"Presumably the president will appoint a vice-chair for banking supervision regulation and that person will probably be more skeptical of the value of regulation than Tarullo was," he said.

"There is no doubt that it is just one more lever that the president will have to pursue whatever financial regulatory initiative he has."

Among the names cited as a possible replacement is David Nason, currently the head of GE Financial Services. 

Wessel noted that Nason was an assistant secretary at the Treasury Department during the financial crisis, when the federal government had to bail out tottering banks that threatened to bring down the global financial system.

"He may be more of a regulatory skeptic than Tarullo but he lived through the crisis," said Wessel, describing Nason as "somebody who is aware of what happens if you take away too many regulations."

No guarantee of a hawk

Wessel also said it was not clear what effect a Tarullo replacement could have on monetary policy, given that Yellen remains as chair, and she has so far sided with "doves" who favor keeping interest rates lower for longer periods.

In addition, the Federal Open Market Committee, which sets the key federal funds lending rate, currently has nine other voting members besides Tarullo, including four regional Fed bank presidents and the president of the New York Fed.

Campaign statements notwithstanding – Trump claimed markets were in a "big, fat ugly bubble" and criticized the central bank and Yellen – there is no guarantee he will appoint hawkish Fed governors who will drive lending rates up faster.

"I never met a president of the US who wanted higher interest rates, and I never met a real estate developer who wants higher interest rates," said Wessel, noting that Trump's economic policies have yet to take shape.

But Yellen, who testifies before Congress on Tuesday and Wednesday (February 14 and 15), will have to usher the Fed's monetary policy through the new fiscal reality Trump creates, all while overseeing a new team of central bankers. – Rappler.com