Anubhav SahuMoneycontrol research
US Fed’s Vice-Chair Stanley Fischer decided to step down well before his Vice-Chair term ends in June 2018. With this it creates four vacancies in the 7-member board of governors in Federal Reserve and gives enough leeway to President Trump. The stage looks set for President’s pet banking deregulation agenda. Indian IT sector with significant exposure to US BFSI needs to watch out carefully as higher profitability of the US financial sector leading to higher IT spends do have a positive rub off on demand.
Federal Reserve Board (The Board of Governors) – Constitution & Appointment
Federal Reserve Board is the governing body of the Federal Reserve System and consist of seven members. They are nominated by the President of the United States and confirmed in their positions by the US Senate. All the members of the Board serve on the FOMC (Federal Open Market Committee), which is the body within the Federal Reserve that sets the monetary policy.
The Board members are appointed for a 14-year term. The Chair and Vice Chair of the Board are also appointed by the President and confirmed by the Senate, but serve only four-year terms. They may be reappointed for additional four-year terms. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board.
Current mix of Federal Reserve board
Janet Yellen’s term as a board member remains till January 2024; however her current term as the Fed Chairwoman gets over by Feb 3, 2018. Though her candidature for the second term as the Fed Chairwoman is under consideration, a low probability is assigned by the market participants to the event.
With Stanley Fischer opting to move out in October this year, there would now be four vacancies (out of seven) in the board. US President has already nominated Randal Quarles and his confirmation is pending at the Senate.
Randal Quarles is the founder of private investment firm Cynosure and had earlier served as a treasury official during George W Bush's administration.
His recent statement suggests he favours some refinement in the banking regulation, which is being construed as a gradual roll-back of regulations.
In recent times, both Yellen and Stanley Fischer have been quite vocal about defending post-crisis regulations. In the recent Jackson Hole symposium, Yellen forcefully defended the regulatory structure. Since both Yellen and Stanley would vacate their positions in the board of governors, Trump administration would have the free hand to nominate members as per their agenda.
Banking deregulation – Trump too close yet so far
While banking de-regulation has been a key reform agenda for Trump, little success has been achieved so far. Recently, a bill named Financial CHOICE has been introduced in the US Congress targeting a roll-back of many features of Dodd-Frank Act. It has already been passed in the House of Representatives and is awaiting Senate’s approval.
# CCAR: The Comprehensive Capital Analysis and Review
US Treasury has also released its proposal to roll back Dodd-Franck Act. Among its key proposals are that banks with less than USD 50 billion in assets would be exempted from federal stress tests. A current limit as per the Dodd-Frank Act is USD 10 billion. Most of its proposals are similar to the one proposed by the Financial CHOICE bill and focus on scrapping Volcker’s rule and curbing CFPB’s authority.
However, it’s noteworthy that political commentators are not very optimistic about the passage of CHOICE bill in the Senate on account of thin Republican majority (52 percent).
US financials outperform on banking deregulation news flow
On expected lines, banking stocks have reacted positively to the developments which indicate that sooner or later, banking deregulation would be on the cards.
While, generally, US financials mimic the movement in US yield curve (difference between 10 year and 2 year US treasury yields), since June 2017 US financials have bucked the trend and held up even when US treasury 10 year yields have fallen, thanks to news flow pertaining to banking deregulation.
Third rate hike less likely this year
While the Trump administration’s focus in the interim has shifted to banking deregulation, Fed’s own priority is not likely to be an early rate hike. Consensus expectations for a December rate hike hover around 27 percent. Fed Governor Lael Brainard reiterated that Fed should be cautious about a rate hike unless confident about inflation trajectory.
Thus, most likely, for the rest of the year, Fed would oversee unwinding of balance sheet and most of the policy actions could be visible elsewhere.
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