Fed may face unnerving shake-up under Trump administration

Thu Dec 1, 2016 5:12pm EST
 
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By Howard Schneider

WASHINGTON (Reuters) - Change at the Federal Reserve could come quickly with President-elect Donald Trump's team pledging to promptly fill high-level central bank jobs and roll out a tax and fiscal plan that could rewrite policymakers' core economic assumptions.

Fed officials already say their plan to gradually increase interest rates may need to be accelerated to accommodate the new administration's economic proposals, which could push inflation higher.

The concerns for Fed Chair Janet Yellen are broader as she faces a 14-month window to preserve her legacy and try to ensure the central bank's independence in the face of a possible four or more Trump appointees to its seven-member Board of Governors.

Yellen's term as Fed chief expires in February 2018, and Trump is likely to name a successor in synch with his desire to cut financial regulation, lower corporate taxes, reorder fiscal policy, and possibly impose some of the constraints on the Fed that Republicans in Congress have long advocated.

Yellen, 70, a ranking Fed official for the past 12 years and the top U.S. central banker since 2014, laid out a long list of concerns during recent questioning before Congress: that any fiscal boost not blow up the deficit and be tailored to improve growth and productivity; that the regulations crafted after the 2007-2009 financial crisis not be trashed; that the Fed not be hamstrung by policy rules or political pressure.

"There is clear evidence of better outcomes in countries where central banks can take the long view, are not subject to short-term political pressures," Yellen said in her testimony. "Sometimes central banks need to do things that are not immediately popular."

Fed officials would not comment on whether Trump and Yellen have spoken, or describe the contact so far between the central bank and the Republican businessman's transition team. Trump transition officials could not be reached for comment.

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U.S. Federal Reserve Board Chairwoman Janet Yellen testifies before a Congressional Joint Economic hearing on Capitol Hill  in Washington, U.S., November 17, 2016.  REUTERS/Gary Cameron/File Photo