NEW YORK (Reuters) - Donald Trump and his fellow Republicans are expected to add more so-called hawks to the Federal Reserve’s ranks, which could offset a dovish tilt next year among policy voters and rattle a fragile Fed consensus to go slow on U.S. rate hikes.
The central bank raised interest rates a notch on Wednesday and signalled that three more hikes were expected in 2017, in a partial nod to expectations Trump will cut taxes and boost spending.
The U.S. President-elect will have two vacant Fed board seats to fill as soon as next month and, given his party’s desire for more aggressive rate hikes, he is expected to choose policy hawks.
He will likely also nominate for Senate approval Fed Chair Janet Yellen’s successor in 2018, a choice that has already sparked speculation on names.
“I’d be looking for someone more hawkish than dovish, than what we’ve been seeing,” Bill Huizenga, the Republican congressman who chairs the House monetary policy and trade subcommittee, said in an interview. The Senate, not the House, confirms the president’s Fed nominees.
While Fed doves generally prefer lower rates to stimulate economic growth and employment, hawks want them higher to avoid an inflation run-up leading to recession.
Wednesday’s decision was unanimous among the 10 central bankers with votes this year, including three regional Fed presidents, Loretta Mester, Eric Rosengren and Esther George, who each cast a hawkish dissent against the Fed’s decision in September to stand pat.
They are among the four to rotate out of the Federal Open Market Committee (FOMC) next year, replaced by ardent dove Chicago Fed President Charles Evans and three first-time voters who became Fed presidents in the last 18 months. This trio, Patrick Harker, Robert Kaplan and Neel Kashkari, have urged only gradual rate hikes in past speeches.
Macroeconomic Advisers, a research firm that publishes a 1-to-10 “voting index,” estimated the FOMC will edge towards the dovish end of the scale at a 3.8 reading next year, from 4.2 now. “Dissents in favour of a slower pace of hikes from some of the most dovish members are ... a possibility,” it said in a note.
Still, Trump will likely name more conservative governors next year and replace both Yellen, assuming she does not stay on as Fed governor when her term expires, and Vice Chair Stanley Fischer in 2018.
Early speculation by former Fed officials, lawmakers, and outside economists suggest Trump could consider as Fed chair, among others: John Taylor, economics professor at Stanford University and a favourite of congressional Republicans; Glenn Hubbard, dean of Columbia University’s Graduate School of Business; Marvin Goodfriend, economics professor at Carnegie Mellon University and former Richmond Fed official; and Kevin Warsh, a distinguished visiting fellow at Stanford University’s Hoover Institution and a former Fed governor.
Reporting by Jonathan Spicer; Additional reporting by Ann Saphir; Editing by Meredith Mazzilli