Abby Joseph Cohen, former chief strategist of Goldman Sachs, thinks “we’ve been lucky to have had two chairs of the Federal Reserve who were experts in the most pressing problems”. Ben Bernanke, who chaired the US central bank during the financial crisis, was a Great Depression expert. Janet Yellen is a labour-market expert at a time when employment issues are to the fore.
Now that US president Donald Trump is looking to appoint a new Fed chair, Cohen thinks “it would be great“ to have Yellen back. But she’s not the only candidate for the job, and Cohen worries that some aren’t sufficiently flexible in their thinking, given the “unprecedented issues” they will have to tackle, including “the unwinding of asset purchases and historically low levels of inflation”. Whoever Trump picks, Fed policy is unlikely to change dramatically. It will “keep taking the foot off the accelerator gradually”, as opposed to “slamming on the brakes”.
Still, interest rates around the world, not just in the US, are unsustainably low, which means that the only way is up. Long-term interest rates (bond yields) will rise more rapidly than short-term ones, especially if the economy continues to perform strongly into next year, as Cohen expects.
One potential spanner in the works is Trump’s tax cuts. Cohen doesn’t believe that the US economy needs any extra fiscal stimulus and is concerned about the rising deficit (the gap between government spending and the tax take) that will result. If the deficit gets too high, or investors lose faith in the president, then “foreign investors could dump dollars and Treasuries”, which would hurt markets.