Looking into a Trump Fed - Deutsche Bank

George Saravelos, Strategist at Deutsche Bank, warns that the current US President has the capacity to re-shape the Federal Reserve. They see the Fed and the US tax policy as the decisive factors of the direction of the US dollar during this year. 

Key Quotes: 

“For all the focus on tonight’s FOMC the stakes for the Fed are much higher this year. Two (out of seven) governor posts are vacant, potentially three more vacancies are coming and most importantly Yellen’s chairmanship is soon ending. President Trump is responsible for the appointments and has the capacity to completely re-shape the Fed and the outlook for US monetary policy well into the
next decade.”

“A dovish Fed does not mean lower UST yields. If under Trump the Fed turns extremely dovish, credibility is lost, inflation expectations spike, UST yields rise and the dollar weakens. If Trump wants a soft dollar he needs to make dovish appointments; but that will not necessarily guarantee low rates.”

“Our bullish dollar view has been suffering on the back of positioning adjustment and a number of US officials, including Trump, commenting on exchange rates in recent weeks. More important for us is the lack of momentum in US real rates since the start of the year.

“Our assumption is that Fed appointments lean hawkish (as most of Team Trump has suggested), and combined with a US stimulus and/or border tax at full employment real yields move higher over the course of the year. It is not Twitter but the Fed and US tax reform/stimulus that will ultimately determine the direction of the dollar this year.”