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Did Both Horses In Race For Federal Reserve Chief Just Take A Dive?

The morning began with Wall Street geared up to hear where Federal Reserve Chair Janet Yellen thinks interest rates are going and how fast.

But by midday, a much different story had emerged: President Trump's two leading candidates to head the Fed in 2018 and beyond – Yellen and National Economic Council Director Gary Cohn – may have both taken themselves out of the running.

Yellen, whose term expires in February, ignored monetary policy and instead offered a strong defense of post-crisis bank regulations in what may be her last speech headlining the Fed's annual Jackson Hole, Wyo., monetary policy conference.

While Yellen's speech came down in favor of reforming the reforms, that message probably isn't aggressive enough to win her another term, given Trump's harsh criticism of the Dodd-Frank regulations passed under President Obama in 2010.

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Meanwhile, Cohn, the former Goldman Sachs president who is the favorite to replace Yellen, was all over the news, telling the Financial Times about his distress at Trump's remarks on the violence in Charlottesville, Va., sparked by neo-Nazi and white supremacist protests and counterprotests. The New York Times reported that Cohn had prepared a letter of resignation, as he came under public pressure to resign.

"Citizens standing up for equality and freedom can never be equated with white supremacists, neo-Nazis, and the KKK," Cohn, who is Jewish, told the FT. He added that he had decided to remain in his post "because I feel a duty to fulfill my commitment to work on behalf of the American people."

Cohn is spearheading tax reform and says he's optimistic that legislation will pass both the House and Senate before the end of the year.

While Cohn said that he has spoken to Trump directly about his concerns, Axios wrote that a source close to Trump predicted that the president would explode upon reading Friday's news reports. Trump is reported to disapprove of people who work for him seeking publicity, with fired aide Steve Bannon's Time magazine cover story said to hurt his standing with the president.

After a number of CEOs resigned from White House advisory councils following Charlottesville, Trump criticized them on Twitter for being "grandstanders."


IBD'S TAKE: On Tuesday, IBD shifted its market trend gauge to "confirmed uptrend" from "uptrend under pressure," the equivalent of a flashing yellow light turning green. But breakouts remain scarce. Read IBD's The Big Picture column each day to stay on top of the action of the major averages and leading stocks.


Investors generally seemed relieved that Yellen's Friday speech made no news on inflation or interest rates. Yellen could have uttered the "T" word — transitory — signaling that she doesn't share Wall Street's apparent conviction that inflation pressure will remain muted in the months ahead. But she did not.

The Dow Jones industrial average, S&P 500 index and Nasdaq composite initially extended morning gains after Yellen's remarks hit the wires at 10 a.m. ET. After a dip into negative territory for the Nasdaq, the were all modestly higher in late afternoon trade. The 10-year Treasury yield slipped to 2.17%, moving even closer to the bottom of its range since the week after Trump's election.

Yellen's speech didn't offer any reason for investors to expect higher rates, which can boost banks' net interest margins. Instead, Yellen's speech offered a defense of the post-crisis regulatory regime. Yet her message about bank regulation was largely positive for the financial sector, though perhaps not enough for her own job security.

Shares of JPMorgan Chase (JPM) rose 0.8%, while Goldman Sachs (GS) added 0.2% on the stock market today.

"The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth," Yellen said. However, she added, "The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system."

The key word is "efficiently," because it suggests Yellen is open to easing the regulatory burden on banks. She called for simplifying the Volcker rule. She also acknowledged that credit availability may have been hampered for small business and homebuyers with less than stellar credit.

European Central Bank President Mario Draghi made even less news in his 3 p.m. ET speech, stressing the need for stronger productivity growth. The ECB could soon announce it will start tapering its bond-buying program.

The Fed, by all indications, will announce a shift in its reinvestment policy on Sept. 20 to gradually begin scaling back its $4.5 trillion balance sheet. Current market pricing doesn't point to another interest-rate hike until May 2018. By contrast, Fed committee members' economic projections in June signaled four rate hikes by the end of 2018. We'll have to wait for clearer evidence about whether Yellen thinks markets have it right or wrong.

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