What Trump Told Yellen In The Oval Office (Next To Gary Cohn)

In an otherwise quiet morning as we await Jeff Sessions’ testimony, a WSJ article is making the rounds which recounts the interactions between Trump and Janet Yellen – who it turns out were born two months apart in neighboring boroughs of New York City – according to which despite Donald Trump’s fierce criticisms of the Federal Reserve in the final weeks of the 2016 election campaign “the nation’s two most powerful economic-policy players—the president and the leader of the central bank—are “off to a surprisingly smooth start.”

According to the WSJ “weeks after his inauguration, President Trump held court with Fed Chairwoman Janet Yellen in the Oval Office. Seated behind the office’s Resolute desk, he told her she was doing a good job, according to people familiar with the exchange.  Ms. Yellen sat across from Mr. Trump in a chair next to  Gary Cohn, Mr. Trump’s chief economic adviser, who has emerged as the key intermediary in the unfolding relationship with the Fed.”

While the conversation took place long before Trump’s subsequent interview with the WSJ in which he once again had good words for Yellen, and suggested that low rates and a weak dollar are the way to go, the WSJ reports that “the president told Ms. Yellen he considered her, like himself, a “low-interest-rate” person. During a roughly 15-minute conversation, they discussed how economic policy might help the millions of Americans who felt left behind during the postcrisis recovery.”

Which is odd, because during his campaign Trump on several occasions extolled the virtues of higher rates, especially in a nation in which yield-starved retirees are forced to seek extra employment or speculate in the stock market just to make ends meet.  Also, as the WSJ notes, “Mr. Trump’s April comments marked a reversal from last year, when he accused Ms. Yellen of keeping rates low to help Democrats.”

Since taking office, the president and his advisers haven’t publicly questioned the Fed’s actions—including its decision to raise short-term interest rates in March and signals it is likely to do so again at its meeting this week. This contrasts with the administration’s approach to other nonpartisan institutions such as the Federal Bureau of Investigation, Congressional Budget Office and the courts.

The approach is less a reflection of any particular personal dynamic between White House officials, Ms. Yellen, and the Fed, and instead illustrates the Trump administration’s decision to abstain from commenting on the Fed, extending an explicit policy of the last three presidencies.

“The Fed will do what they need to do, and we respect the powers of the Fed,” Mr. Cohn said in a March interview on Fox News, one of his rare public comments on the central bank.

Mr. Trump’s hands-off approach to the Fed reflects the influence of his market-savvy advisers and his changing circumstances. No longer waging a populist campaign, he is able to maintain credibility with financial markets by staying neutral on the Fed during his first year in office.

Still it remains an uneasy truce: “if the Fed takes action Mr. Trump perceives to be threatening, he could become more vocal, said Peter Conti-Brown, a financial historian at the University of Pennsylvania’s Wharton School. “The minute that Morning Joe has a report about a Fed action that could harm Donald Trump, set an egg timer and see how long before he tweets.”

What about Yellen’s future? In the follow up interview, Trump said he hadn’t ruled out nominating Yellen for a second term before her current one expires next February. Meanwhile, the White House’s National Economic Council, led by Cohn, is about to begin the process that will decide whom to nominate as the next Fed chairman, according to a senior White House official.

Could Yellen’s replacement be Cohn himself, as previous reports have suggested?

Cohn hasn’t said if he is interested, but former colleagues said he has cultivated an appreciation for the power of the Fed during his long career on Wall Street and for the relative freedom of the institution during his current stint in Washington.

Mr. Cohn knows several central-banking officials from their time at Goldman Sachs, including New York Fed President William Dudley, the bank’s former chief economist, who met with Mr. Cohn in the early weeks of the administration.

All of this comes at a time when the Fed is facing the most intense political scrutiny in decades. The financial crisis and its aftermath prompted lawmakers to debate monetary policy in a way not seen since Paul Volcker was Fed chairman in the 1980s.

And while things remain “fluid” when it comes to Trump’s relationship with the Fed, and the fate of the Fed chair, one thing can be assumed: as long as the market keeps rising, the peace between Yellen and Trump will go on. However, should stocks crash, all bets are off.