Vail Daily column: Federal Reserve policy may change under Trump
November 25, 2016
While there has been a lot of speculation on how Donald Trump might change the makeup of the Supreme Court, there has been relatively little note taken of how he might change the Federal Reserve Board, which runs the Federal Reserve Bank.
The Federal Reserve Board is chaired by Janet Yellin, whose term expires in February 2018 and governed by her and six other members. Two of those posts have recently been vacated and one other term ends in June 2018. Hence, four of the seven posts will be Trump nominees. These nominees require approval by Congress, but now that the Republicans control both houses that may not be an issue.
Once appointed technically the board does not answer for its actions to anyone, including the president or Congress and has been famously contrary many times to the wish list of the administration. However in the past, there has usually been a mix of appointees from different administrations, and now the majority will be Trump nominees.
As Trump's economic policies are far from clear, and what he has posed is far from proven, it's unclear what expectations he might have of his nominees. But we do know that he is not a fan of the Consumer Finance Protection Bureau, which was a creation of the Obama administration. The CFPB is an agency of the Federal Reserve Board and accountable only to the Fed.
I would speculate one of the questions Donald Trump is going to ask his potential picks are their views on reducing the power of the CFPB. As the CFPB has done nothing but add hidden costs to obtaining a mortgage and make it harder to get a home loan I could, for once, fine some common ground with The Donald on this one.
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The big questions the Fed must deal with is when and by how much should interest rates increase? On the one hand, when rates increase the federal government, as the nation's biggest borrower, sees the biggest single impact. Every 1/4 percent increase in the cost of borrowing costs the federal government about $130 million per day in additional interest on its own debt.
But if the Fed doesn't move to raise rates to pace economic growth, then inflation will kick in. Trump has made it clear he is not happy with the Fed's current policies, but he has not really posed anything new to compare the current policies to.
To a certain extent, the Fed's future actions must mirror the reality of the economy. The current trend of investors demanding a higher rate of return on money lent to the US government is indicative that in time the fed will have to raise short term rates.
Tempo and Timing
The tempo and timing of those rate hikes will determine the impact on long-term mortgage rates for homeowners. Serial rate hikes on a regular basis are attempts to rein in economic growth to contain inflation, and typically cool the stock markets which in turn can send mortgage rates lower.
The one thing that is a given is that we are heading into uncharted waters, and every homeowner needs to be at least aware that things can and will fluctuate rapidly with little warning.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgage guy.com.
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