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President Trump could mean economic policy via presidential decree

Notice just how little attention financial markets paid to Federal Reserve Chair Janet Yellen’s congressional testimony Thursday morning?

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Even before the dust settled on America’s shock upset in the presidential election, Fed watchers and economics reporters were duly penning their respective pieces on what a Donald Trump presidency might mean for the central bank.

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All the power to them. I tried, and failed. Why? In the face of a spate of rising hate crimes that is mirrored in the official and rumored appointments of openly hateful, racist people to the highest positions of power in the United States, writing about the minutiae of interest rates somehow loses its luster.

I just couldn’t write a same old ‘what Trump means for Fed story’ because it doesn’t get at the seriousness of the moment.

Worse, writing about the Fed as if the election had no major domestic and global consequences on a social level, many of which are likely to affect the economy in unpredictable ways, normalizes the deplorable rhetoric and behavior that propelled the Republican candidate and former reality television star to the highest office of the land.

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The growing irrelevance of Fed policy under Trump will be the theme: Now we’re in for economic policy via presidential decree, somewhat like in Venezuela under Hugo Chavez. Like Trump, Chavez was democratically elected. He liked to give very long speeches, which he would pepper with market-moving policy measures, to the frustration of local reporters.

With these vital, world-shaking caveats out of the way, we can start thinking through what Donald Trump will do with the Federal Reserve once his advisors tell him it's time to turn his attention in the central bank's direction. Given the number of open positions and soon-to-expire terms at the highest levels, Trump could do quite a bit to reshape the central bank.

Donald Trump said so many contradictory things about the Federal Reserve during the presidential campaign that gleaning exactly what his approach to central bank policy will isn’t quite an exact science. On the one hand, he accused Fed Chair Janet Yellen of keeping interest rates artificially low to help fellow Democrat, President Barack Obama. On a separate occasion, he gloated low rates were wonderful for his real estate businesses, calling himself the "king of debt."

Still, if Trump is to achieve even a modicum of the bigly economic promises he made during the campaign — including somehow bumping up to 5 percent an economic growth rate that has barely made 2 percent for most of the weak recovery since the Great Recession of 2007-2009 — he will need loose monetary policy. This means that while Trump may pay lip service to Republican talk about the need for tighter monetary policy, he won't plausibly follow through.

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"While Donald Trump the candidate criticized Fed Chair Janet Yellen for being too dovish, Donald Trump the President is likely to have a different view," says Olivier Blanchard, senior fellow at the Peterson Institute for International Economics. 

"Some of his advisers are however more genuinely hawkish, so the new appointments, now and in coming years, may move the Fed in a more hawkish direction," cautions Blanchard, the International Monetary Fund's former chief economist. 

Joseph Gagnon, an ex-Fed economist also at PIIE, offered a similar take in this video interview

This column does not necessarily reflect the opinion of Insider.

Read the original article on Peterson Institute for International Economics. Copyright 2016.

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Opinion Op-Ed Donald Trump
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