There are some important implications of Tarullo leaving early:

  • Trump gets to pick THREE Fed Governors, ONE Fed Chair (next Feb) and ONE Vice Chair (next June). Yellen and Fischer may not choose to stay after their terms as Chair and Vice Chair are over.  They could stay if they wished since their Board terms are not over until 2024 and 2020 respectively.  I would guess they choose to leave.  They are both pretty old, and the last thing you need in your golden years is to live in fear of being harassed via Twitter.  If they chose to leave, Trump could be selecting over half of the Board of Governors in the next 16 months.  So much for “independence of the Fed.”  It’s pretty amazing how lucky he has gotten – he won the election with a minority of voters, his Party wins both houses of Congress, he gets to pick the tie-breaking Supreme Court justice, and now he gets to pick his Board of Governors.  What more could you ask for as President?  With great power comes great responsibility.
  • Tarullo is a dovish voice that will be leaving the Fed. Tarullo is also a Democrat.  So he was doubly likely to look at the post-Trump world and think we needed to be cautious.
  • The bank President voters now outnumber the Board voters. The balance of power becomes interesting, in that now there will only be four Governors, as compared to five bank President voters.  I had always thought the Board members were a little tighter, and this makes sense in that they all work together.  Now the Governors are even more outnumbered by the twelve (typically more hawkish) bank Presidents.  Fortunately, Dudley seems to side more with the Board.
  • The new bank President voters are somewhat more balanced, leaning slightly dovish. Dudley leans dovish.  Evans had been historically very dovish.  Kashkari and Kaplan are both new to the FOMC, both from Goldman, and both seem balanced (Kashkari marginally dovish and Kaplan marginally hawkish).  Harker leans hawkish.  As an aside, Kashkari had an interesting piece on how he thinks about interest rate decisions: https://medium.com/@neelkashkari/why-i-voted-to-keep-rates-steady-f032461ed0a7#.l79kviw77 .  Take a look if you want to see how a middling, potentially tie-breaking FOMC voter thinks about rate policy.

On the margin, the above slightly increases the likelihood of hikes this year (starting in May).  But the balance of voters still leans dovish.  However, next year is a different story, with Lacker, Mester, and Williams coming on board.  It’s not clear who Lockhart’s successor will be.  So this would be yet another reason to want to own 2018 hikes.