Wall Street Wonders About a Fed Without Powell as Wait Goes On
(Bloomberg) -- The longest wait in the modern era for news about who will chair the Federal Reserve is triggering debate in financial markets about the impact of any unexpected replacement of Jerome Powell at the helm.
For months, economists and investors alike have anticipated that Joe Biden would tap Powell for another term -- reestablishing a tradition of a first-term president sticking with the predecessor’s Fed chief. But the amount of time it’s taking Biden, along with speculation he could be replaced by board member Lael Brainard, has seen doubts creep in.
Economists still see Powell as the odds-on favorite, a Bloomberg survey shows. But Roberto Perli, a former Fed official now at Cornerstone Macro LLC, detected signs of concern about his replacement in moves in the Treasuries market last week. And given how well equities have done under Powell, a replacement could see an immediate reaction, at least for a short while, market participants say.
“It would be a shock,” Marvin Loh, senior global macro strategist for State Street, said by phone. “With everything going on -- between inflation, and the jobs market and everything else -- changing midstream, it’s not necessarily the time to break the continuity that Powell brings.”
The Fed has just begun the process of withdrawing pandemic-era stimulus, and while policy makers on Wednesday laid out their expected timing and tempo for zeroing out their bond-purchase program, the outlook for interest-rate hikes is unclear.
Perli, co-founder of Cornerstone Macro, said last week that one reason shorter-dated yields rose by more than longer-dated ones was some level of concern that a Powell successor might not be able to keep hawks on the Federal Open Market Committee from forcing an earlier rate hike.
Those moves have since eased, but volatility could yet return as traders gauge whether sustained high inflation may force the Fed to increase its benchmark rate next year, or speed up its pace of asset-purchase tapering.
“It matters a lot, this decision” on the Fed chief, Evan Brown, head of asset allocation at UBS Asset Management. “We’re at a particularly fraught time, challenging time for the Fed, where the markets are challenging the Fed’s guidance. So how much credibility will that guidance have if you have a new Fed chair?”
Announcing a new chair could inject uncertainty into the market for interest rates that would reverberate across asset classes, Brown said.
With Brainard seen as the most likely alternative to Powell, any disruptions could prove limited and short-lived, however. As is typical for Fed board members, she hasn’t dissented in policy decisions. Her record is well known, having served as a governor since 2014 and in senior economic positions during the Obama and Clinton administrations.
Policy decisions are consensus-driven, Anastasia Amoroso, chief investment strategist at iCapital Network, highlighted.
“There’s enough institutional memory and institutional stability to ensure the policy is not going to deviate wildly from what we’ve seen thus far,” Amoroso said. “Whoever the Fed chair is, or whatever the composition of the Fed is, there’s likely a framework in place that’s going to endure.”
Biden is likely to present a decision not just on the Fed chief, but a slate of candidates for open or opening positions on the board, Senate Banking Committee Chair Sherrod Brown said last week -- something that may help explain the later-than-usual timing of an announcement. Biden said on Tuesday that he’d soon announce his choice of nominees for chair and other vacancies at the Fed.
Powell’s perceived record of having tilted policy based on market moves -- such as abandoning the Fed’s tightening cycle in early 2019 -- has helped make him a Wall Street favorite.
“Chairman Powell has repeatedly followed policies that have supported asset prices,” said Michael O’Rourke, chief market strategist at JonesTrading. “At some point, I think markets would realize it is almost impossible to find a replacement who will be friendlier.”
With the pandemic and its attendant shocks to both supply and demand continuing to cloud the outlook, the person at the Fed’s helm could be facing intense challenges next year -- and history shows it can take time for central bankers to calibrate their communication skills. Powell himself was assessed to have roiled markets in 2018 by hewing to a message of tightening as liquidity got squeezed.
“The risk is that this cycle is moving at a rapid clip,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “A new Fed chair may be put to the test quickly if financial conditions deteriorate or inflation needs to be snuffed out more urgently.”
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