By Lucinda Shen
February 3, 2018

Friday marked the last day for Janet Yellen as the head of the Federal Reserve, giving way to her successor, 64-year-old Jerome Powell.

Powell previously worked as a partner at private equity firm The Carlyle Group and was nominated to the Fed’s Board of Governors by President Barack Obama in 2011.

He is expected to be sworn into the position, arguably among the most powerful after President Donald Trump, Monday.

Powell takes over at a rosy time for the U.S. and world economies. Most recently, the U.S. economy added 200,000 jobs in January, according to the Bureau of Labor Statistics, better than what economists had predicted. Major companies have signaled benefits from the current administration’s deregulatory stance and tax cuts—leading to a soaring stock market in 2018.

While Trump has made eyebrow-raising hires in segments including the Environmental Protection Agency, Powell is considered a consensus-builder, and a continuation of the previous Fed chair.

“He’s been part of the consensus,” Yellen said of Powell in December.

Powell is expected to gradually raise interest rates three to four times in 2018—with the market watching closely over what he might do. And certainly, even though he has preferred to stay behind the scenes, he will make headlines.

Here’s what analysts and market watchers say can be expected of Powell’s tenure.

The Fed’s Challenges: Higher Interest Rates, and Trump’s Tax Cuts

Powell is expected to follow Yellen’s footsteps and raise interest rates in 2018—watching market indicators all the while.

“The hallmark of Janet’s policy has been caution and watching the data. I suspect he will continue that,” said Alice Rivlin, a senior fellow of economic studies at the Brookings Institute. Rivlin previously worked with Powell at the Bipartisan Policy Center, where Powell was a visiting scholar.

Trump’s tax cuts and planned $1.5 trillion in infrastructure spending, which are expected to boost the economy while escalating the budget deficit, could pose a challenge for Powell. The new policies will create more moving parts for the Fed to watch out for—which could complicate Powell’s attempts to normalize the Fed’s balance sheets.

“It will pose some dilemmas as to whether they will have to move faster on normalization,” Rivlin said.

As Powell raises interest rates and unwinds the Fed’s $4.5 trillion balance sheets, he will also have to watch out for the excitement in the market.

He needs to dampen frothiness. If cryptocurrencies are a metaphor for a new era, that would be troubling,” said Greg Valliere, Horizon’s chief global strategist. “Powell obviously needs to raise the federal funds rate but he has one very important asset that could keep the 10-year bond yield from blasting off. Even now, with a roaring economy and stock market, the demand for safe-haven U.S. Treasuries is remarkably robust.”

How Might Powell’s Leadership Impact Stock Markets?

Powell’s entry could cause uncertainty in markets. According to LPL Financial’s Chief Investment Strategist John Lynch and Senior Market Strategist Ryan Detrick, markets tend to dip slightly in the months following a new Fed chair’s entrance.

“In fact, going back more than 100 years, the Dow has been down 0.3% on average during the first six months after a new Fed chair takes office,” Lynch and Detrick wrote in a note this week. “Turning to more recent history, since 1950, the average intra-year drawdown for the S&P 500 during the first calendar year of a new Fed chair has been 15%.”

Separate from that uncertainty, though, there were already some signs Friday that investors are already seeking out Treasuries instead of stocks as inflation picks up thanks to a stronger economy. The S&P 500 slid roughly 2% Friday, after the BLS reported strong wage growth. Higher wages can point to higher inflation, which, in turn, could lead the Fed to raise interest rates more aggressively. Those concerns allowed the 10-year Treasury yield to rise above 2.8%.

Higher interest rates could also leave the stock market more vulnerable to shock—making it more volatile.

“At the same time, we expect that the course of policy under Powell will differ little from Yellen in one key respect: Following through on the Fed’s ‘normalization’ of U.S. monetary policy requires a fundamentally ‘shock free’ environment,” Citi Private Bank analysts led by Steven Wieting wrote in a note this week.

A Potential Recession?

Underlying the rosiness of current markets is the age of the bull market. The current rally is seven months away from being the longest ever—raising questions about when the champagne will stop flowing.

“History suggests that in his four years he will face a recession. And that’s going to be a challenge to the Fed because it probably won’t be able to rely on just cutting short-term interest rates as the Fed has done in the past,” said David Wessel, director of the Hutchins Center at the Brookings Institution, in an interview with NPR. “And that’ll mean considering these so-called unconventional tools, like buying a lot of bonds, to get us out of it.”

Navigating the Politics of D.C.

Despite the Fed’s independence, past presidents have tried to sway their Federal Reserve chairs—and have been angered by moves within the Reserve. Take President Bill Clinton, for instance, who reportedly “raged inside the White House” any time his Fed Chair Alan Greenspan raised interest rates, according to economist Alan Binder.

But the question still stands whether Trump will do the same. The Fed is set to raise interest rates—a move that may undermine the rising stock market. Trump has pointed to the stock market’s continued growth as a sign of his successes.

“All presidents worry the Fed will undermine their activity,” said Rivlin. “Usually that it will raise their interest rates too fast.”

Will Powell have to fight to maintain his independence? Only time will tell.

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