Analysis: Powell’s renewal gives investors stability

NEW YORK, Nov. 22 (Reuters) – US President Joe Biden’s choice of Jerome Powell to continue as Federal Reserve chair reassured investors who said it provided some predictability as the central bank prepares to hike rates and slows the pace of bond purchases.

Many investors were hoping that Powell, who was appointed president by President Donald Trump in 2017, would be reappointed by Biden for another four-year term. On Monday, Biden appointed Powell for a second four-year term, with Lael Brainard, the Federal Reserve board member who was the other top candidate for the job, as vice president.

Biden also has three seats to fill at the Fed, including the vice president of oversight, and intends to choose them in early December. Read more

Powell’s current tenure, due to expire in February 2022, has been positive for risky assets, with the S&P gaining 69.7% since his appointment on February 5, 2018 and hitting a series of new records helped in part by emergency measures. the Fed launched in response to the coronavirus pandemic.

“My reaction is a reaction of relief,” said Peter Tuz, president of Chase Investment Counsel, Charlottesville, Virginia. problem.”

While Tuz said Powell was “loved by both parties, he has been a fairly stable force.”

Powell had always been the frontrunner, but he was seen as less of a slam-dunk after his odds fell in betting markets following strong criticism of his performance by Progressive Democrats and a trade scandal among officials. from the Federal Reserve. L1N2R020J

Online betting site PredictIt gave Powell a 79% chance of being confirmed by the US Senate on Monday morning, up from 90% on September 12, while the odds of Federal Reserve Governor Lael Brainard being appointed had passed at 23%. from a low of 6% in September.

While the leadership of the U.S. central bank is still important to markets, Biden’s decision takes on added significance this year as the Federal Reserve begins to cut its $ 120 billion in monthly bond purchases.

At the same time, the Fed faces a historic surge in inflation as global supply chains remain disrupted by the coronavirus pandemic. The Fed released its asset purchase schedule earlier in November as it begins to slow buying.

“The markets will take this as a sign of relief,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.

Pavlik said Brainard taking on the role of vice president “at least puts some kind of pressure on Powell not to move too quickly with the rate hike.”

Brainard, who was appointed to the Fed board by former President Barack Obama in 2014, is widely seen as more accommodating than Powell, in part because of his willingness to maintain super-easy monetary policy until that there is more progress on the recovery of employment.

Prior to the announcement, markets had factored in some upside risk from Brainard, and Powell’s announcement caused fixed income markets to incorporate “a little more Fed tightening” as the Bank stocks rose, “Brainard being seen as more dovish on monetary policy. policy,” TD Securities analysts wrote.

Yields on US government bonds, which move in the opposite direction of price, rose on the news, with those on two- and five-year Treasuries reaching their highest levels since early 2020. The dollar extended its gains against a basket of currencies and the S&P 500 gained but then reversed at the end of the day.

Fed funds rate futures, which track short-term interest rate expectations, have fully incorporated a quarter-point tightening by next June, up from over 90% before the announcement by Biden.

NatWest analysts said that even though in an environment of high inflation the difference between Powell and Brainard would be “essentially zero”, they said “it is possible that it can be argued that a gradual acceleration” is more likely in December under Powell.

Reporting David Randall; additional reporting by Stephen Culp and Shreyashi Sanyal; additional reporting by Gertrude Chavez-Dreyfuss; written by Megan Davies; edited by Nick Zieminski

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