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ABS East: February likely end of road for Yellen

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Asset-backeds have long benefited from the low interest rate environment, which makes higher-yielding assets relatively more attractive. But participants at an industry conference appear to think that the party cannot go on forever.

A poll of audience members at a morning session participants put Fed Chairman Janet Yellen's chances of being reappointed by when her term expires in February at zero.

Rather, they are confident President Trump will appoint someone expected to be more hawkish on inflation, such as Trump's chief economic adviser, Gary Cohn (who received 55% of the audience vote), or Treasury Secretary Steven Mnuchin.

Asked where the Fed funds rate would top out next year, 61.5% of participants indicated that they expect it to top out at 1.5% in 2018; another 23.5% see it going to 1.75%. Only 8% see it holding at its current rate, 1.25%.

Rep. Andy Barr, R-Ky., a panelist at the ABS East session, said he thinks Yellen's odds of being reappointed are not quite that bad. "I don't think it's zero," Barr said.

Barr, the chairman of the Monetary Policy and Trade Subcommittee, said he has “great respect” for Yellen, despite his criticism of her “politicized” policy of a prolonged, low interest-rate environment that he and other panelists, including Jefferies chief market strategist David Zervos, argue stymied the U.S.'s post-crisis economic recovery.

However, Yellen’s pro-regulation stance also puts her “at odds” with the Trump administration, which Barr says puts her chances at under 50% for reappointment. “And that would be rare,” he said. “I believe there have only been three Fed chairs in the history of the Fed who have not been reappointed for at least one term, so history is on her side.”

“But again, I would argue that because her views on financial regulation and Dodd-Frank are so fundamentally at odds where the administration is headed, that puts her at a disadvantage.”

Barr pointed to the nomination of former Bush administration Treasury official Randal Quarles to the Federal Reserve vice chair post, and President Trump’s rumored interest in picking economist Marvin Goodfriend, a professor at the Carnegie Mellon Tepper School of Business, to the central bank’s board of directors.

“If those two are added, you’re definitely seeing a shift towards a more hawkish board of governors,” said Barr, addressing an audience at a panel discussion on the monetary policy outlook of the Trump administration.

Barr is one of the securitization industry’s strongest congressional advocates, and a frequent speaker and panelist at industry get-togethers by IMN, SFIG and the Loan Syndications & Trading Association.

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Financial regulations Monetary policy Federal Reserve