#Market Strategy — 03.11.2017

The Federal Reserve: Jerome Powell at the Helm

Edouard Desbonnets

Will Jerome Powell continue Yellen’s monetary policy?

The nomination

The nomination process of the next Chairman of the Federal Reserve was unusual this time round. In keeping with his unconventional style, the US President created a captivating show to keep everyone in suspense. He initially favoured five candidates: the current Chair Janet Yellen, governor Jerome Powell, the economist John Taylor, former governor Kevin Warsh and director of the National Economic Council Gary Cohn. Slowly but surely the shortlist was whittled down to three: Powell, Yellen and Taylor.

Finally, Donald Trump nominated Jerome Powell with a mandate to lead the Fed for the next four years (subject to the Senate’s approval), He replaces Yellen, whose term ends on 3 February 2018. President Trump will also nominate the Fed Vice Chair shortly.

The new Chair

Republican, lawyer and former investment banker, Powell has been a member of the Federal Reserve Board of Governors since mid 2012. His views on monetary policy are similar to Yellen’s and he has always voted in line with her at all Fed meetings. We therefore expect Powell to pursue the US central bank’s rather accommodative monetary policy. On the other hand, Powell has a more pronounced taste for deregulation, which is consistent with the policy that Trump wants to put in place.

The Fed in 2018 and market impact

With mandates coming to an end and resignations, Trump had a golden opportunity to reshape the composition of the Monetary Policy Committee at the very beginning of his tenure. Of the seven governors (permanent voting members for 14 years, nominated by the US President and approved by the Senate), Trump appointed two of them, leaving three vacant seats to fill. Moreover, it is not impossible that Yellen will resign from her governor position due to her non re-election as Fed Chair, which would create another vacancy. However, note that once in office, governors are required to act independently without making any reference to the President or to politics in general.

Looking to the future and what the new leadership might mean, it is likely that Powell will pursue monetary policy in line with Yellen’s legacy, as mentioned above. Indeed, they share the same views, and Powell would inherit the same team of experts in charge of data and economic projections. It is therefore seen as continuity through change. Powell is expected to continue the Fed’s monetary tightening cycle and the reduction of its balance sheet, for which he voted. His main challenges, in the short term, will be to tackle low inflation and to balance the effects of the US tax reform.

Two days ago, the Fed voted to leave rates unchanged, as expected, but strengthened its assessment of economic growth, thus paving the way for another rate hike in December.

We have decided to somewhat modify our Fed outlook due to the assumption that US growth should peak in 2018 and fall back to 1.9% in 2019. We now expect a rate hike in December, followed by three next year, but none in 2019 as the US economy is projected to slow down, taking the terminal rate to 2.25% from previous 2.50%.