What implications will a change in US Federal Reserve chairman bring about?
While inflation has been at the top of market participants’ minds lately, a potential change in the US Federal Reserves (“Feds”) Chair has also sparked chatter in the investment world due to the delayed decision by US president Joe Biden amid this crucial time - central bank preparation to taper its asset purchases and starting rate hike as early as next year.
To give our investors more context, the race on who will be the next Fed chair lies between the current Fed chair, Jerome Powell and Fed governor Lael Brainard, albeit the former being favoured in the betting market.
Who is Lael Brainard and what kind of Fed chair will she be?
Lael Brainard is a Democrat and an economist who has been on the Fed’s board of governors since 2014 and is one of the front-runners for the post currently occupied by Jerome Powell.
Similar to Powell, she believes that inflation is transitory and should soon decelerate when Covid-19 disruptions dissipate. As such, investment professionals have perceived her as more dovish, which essentially means that she might be less inclined to tightening monetary policy than the incumbent should she be named the next Fed chair. Nonetheless, we remain cautious that there are no signs that Brainard may not introduce a rate hike next year to curb inflation.
On matter of monetary policy (purchase or sale of securities and setting of interest rate to guide the economy), the two are on the same page. However, where they differ is on the Fed’s power to regulate and supervise banks, including forcing financial institutions to have more cash when the economy is booming in order to weather downturns. A stricter approach favoured by Brainard could potentially be useful in an inflationary environment.
Possible market reaction
In our view, markets are unlikely to react much if Powell is named Fed chair again but a Brainard nod could spark some moves. A Brainard pick would likely cause the US bonds (bonds rallied to the news that Biden had interview Brainard for the job) and currency market to price in a later start to Fed rate increase.
This means that we will see a weaker dollar and yields begin to trend lower - Investment professionals are expecting two to five year yields to shed as much as 10bps, with longer maturity yields pricing in more inflation risk premium. In addition, a later rate hike will bode well for equities since lending rate will remain cheap. That said, we believe that these potential market reaction from a change in Fed chair will prove short-lived.
Final thoughts
Should Lael Brainard be chosen by the US president to replace Fed chair Jerome Powell, her confirmation will depend on whether she can win over Senator Joe Manchin who has been warning about inflation or win Republican votes.
Ultimately, whoever lands the job as the next Fed chair will be hostage to the uncertain inflation and growth landscape. We reiterate that investors should not get too emotional over the market movements incoming, should there be any, but instead stay true to their investing principles that have worked for them.
Disclaimer: The information herein was obtained and derived from sources that we believe are reliable, but while reasonable care has been taken to ensure that stated facts are accurate and opinions are fair and reasonable, Tiger Brokers does not represent that it is accurate or complete and it should not be relied upon as such.The information expressed herein is current and does not constitute an offer, recommendation or solicitation, nor does it constitute any prediction of likely future stock performance. Article source and views: Bloomberg and other third party sources.
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