How Fed Governor Tarullo Stepping Down Changes The Balance Of Hawks And Doves On The FOMC

Tarullo — Proponent Of Banking Reforms

In a letter to President Donald Trump, Tarullo reportedly said he wants to quit on or around April 5, although his term is set to expire only by 2022. Given that Tarullo was instrumental in bringing big banks and non-banking financial institutions under the regulatory net in order to prevent a Lehman-like collapse, this wasn't a surprising development.

Deregulation At The Top Of Trump's Agenda

Trump and the Republicans have been very vocal about wanting to deregulate the banking system, as they see the rules and regulations put in place following the Dodd-Frank Act as stifling growth of the banking system, and in turn, the economy.

Tarullo's planned resignation now paves the way for the Trump team to expedite the deregulation process by appointing officials who are sympathetic to their cause. The Fed's board, which comprises seven governors, has now only five members; Tarullo's departure would mean three of the seven seats would be vacant. On top of that, Fed Chair Janet Yellen's term is set to expire in early 2018.

Fed Board On Course For Overhaul

Ahead of the overhaul of the Dodd-Frank Act, the Trump team could look to overhaul the Fed's board so that it could help them to push through a replacement for the Dodd-Frank Act, even if it hits the roadblock in Congress due to a partisan gridlock.

Likely Replacement

Among the likely replacements doing the rounds are David Nason, an executive at General Electric Company GE's financing arm and former BB&T Corporation BBT CEO John Allison. A Wall Street Journal report suggested that many other candidates were being interviewed.

More Measures To Make Fed More Accountable And Transparent

Another grievance of the Republicans has been regarding the transparency and accountability of the Federal Reserve. The Trump administration is believed to be working on several measures to reform the Fed, including ones to make the Fed subject to more Congressional scrutiny, limit its discretionary powers and transform it into an organization that formulates monetary policy based on rules.

FOMC Membership

The Federal Reserve's monetary policy setting arm the FOMC consists of 12 members, the seven Fed board members, the New York Federal Reserve Bank president and four out of the remaining 11 regional Federal Reserve Bank presidents, who serve a one-year term based on rotation.

The 2017 FOMC members include:

• Fed Chair Janet Yellen.
• New York Federal Reserve Vice Chairman William Dudley.
• Chicago Federal Reserve Bank President Charles Evans.
• Philadelphia Federal Reserve Bank President Patrick Harker.
• Dallas Federal Reserve Bank President Robert Kaplan.
• Minneapolis Federal Reserve Bank President Neel Kashkari.
• Board Governors Lael Brainard, Stanley Fischer, Jerome Powell and Daniel Tarullo.

Dove–Hawk Scorecard

The current FOMC is a dovish majority, with six out of the 10voting members (a trimmed number from the 12 norm due to vacant seats on the board) being dovish. Yellen, Dudley, Evans, Kashkari, Brainard and Tarullo are all have dovish predisposition. Meanwhile, Kaplan, Fischer and Powell are centrist and Harker is a hawk.

With Tarullo's departure by April, the dovish population of the FOMC would fall to five. Even this drop could not tilt the monetary policy stance towards a hawkish one. However, at least it theoretically, leaves the door ajar for a balance in the FOMC, if the centrists align themselves with the lone hawk.

In pre-market trading, SPDR S&P 500 ETF Trust SPY was up 0.24 percent at 231.51.