Yellen's Last Hike and the Next Fed Chair

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Janet Yellen, you're fired!

For the past 20-30 years, the Federal Reserve has been dominated by academics largely out of MIT. Jim Bianco at Bianco Research says that's all going to change under Trump, starting with Fed chair Janet Yellen.

Here's what he recently told FS Insider:

Yellen's Last Hike

"I've jokingly said that when it comes to the story with the Fed this year, it's that the Fed will raise rates in June and then Janet Yellen will be fired by Trump right after that. Her term is up in January 2018. What we've learned about Trump is what he says he means and what he means he says, and he has said repeatedly during the campaign that he doesn't like Janet Yellen, doesn't think she's done a good job. She's done, she's out. And she's got another year to go...so that's what I mean when I say the Fed will raise rates the middle of the year and then Trump will fire Yellen."

Kevin Warsh?

"Harvard University did a study of all the Fed governors and Fed chairman all the way back to its founding in 1913 and what they found was until about 20-30 years ago, they were all largely lawyers or successful business people or successful bankers. They were practitioners in the private sector that showed a level of success and then they sat on the Federal Reserve Board to help advise the Federal Reserve on what was the best policy. It's only in the last 20-30 years that we've now changed that to PhDs and economists and we just continually empty the MIT economics department into the Federal Reserve Board. I think, at a minimum, Trump ends that. He will go back to successful business people, successful lawyers to bring their knowledge and skill to the Federal Reserve as opposed to PhDs and economists. Who might fit that bill? The president has a CEO policy council meeting with 20 or 30 people—captains of industry, CEOs, and chairmans of the board of major corporations. One person who is at that meeting...is Kevin Warsh who used to be a former Fed Governor who is now at the Hoover Institute over at Stanford University. I think Kevin Warsh fills the bill that what Trump wants as the next Fed chairman."

Bianco also discusses the large divergence in “hard” vs. “soft” economic data, his outlook for stocks and bonds in looking at futures market data, why the “reflation trade” will end up being more inflation and less real growth, China’s capital outflow problem, and, lastly, why he thinks crude oil is heading lower.

Here's some of what he had to say about Trump and bonds:

Extreme Readings in the Bond Market

The enthusiasm that Trump will be positive for business is leading to a reflation that I think will be more inflation than real growth. There will be real growth in there too but there will be more inflation. That should lead to the 10-year note, which is trading at 2.45% right now, going to somewhere close to 3% at the end of the year. Now that I've said that, I will fully concede that that is probably the most consensus call you can make right now that rates are going to go higher and the reason that I bring that up is if you look at the sentiment data in the bond market, whether you look at economist surveys or you look at bond manager surveys or the speculators surveys in the futures market, we've got the biggest short in some cases ever. Everybody is positioned for some kind of reflation taking bonds to 3%...so I don't think that's going to happen right away and I think that most likely the next move will probably be to 2% by the middle of the year and a short squeeze to cast some doubt that we are going to have reflation, then the reflation kicks in and goes to 3%.

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