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The Federal Reserve and Jerome Powell – Phillip Futures Research


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Jerome H. Powell was nominated in late November by President Trump to lead the Federal Reserve.

Current Fed Situation

The Federal Reserve (Fed) Board of Governors supervises and regulates the operations of the Federal Reserve Banks and the U.S. banking system in general. They are also the decision making body for monetary policies. The Fed Board of Governors consists of 7 members, of which at present there are 3 vacant seats due to resignations by members. In November current Fed Chairman Janet Yellen stated that she will step down from Fed after her term ends in February 2018. This would mean that after she steps down, there will be 4 vacant seats in the Fed Board of Governors. Therefore President Trump will be able to nominate 4 candidates of his choice to fill these seats, and revamp the Fed.

Thus it is expected that the candidates whom he will most likely nominate are likely to share the same views as him, which is the deregulation of financial markets and gradual interest rate rises.

 

Analysis on the new Fed Chairman Nominee

Powell has been scrutinised by market watchers on having no Economics of Finance related education background unlike past Fed chairmen, and may not have strong enough fundamental knowledge on economic policies to manage Fed well. However, he has been part of Fed since 2012 and has sufficient experience and deemed to have knowledge on how the organization functions.  The Senate Banking Committee were also convinced by Powell’s principals and experience despite him not being an economist by training, and voted to recommend him for confirmation as Federal Reserve chair after a confirmation hearing.

Based on his recent speeches, it can be seen that he shares a similar view as Yellen. Thus it is unlikely that his policies will differ much for the current ones, which is to gradually nominalise rates based on the economic situation and to reduce Fed’s balance sheets predictably. However unlike Yellen, he has indicated previously that he does not have major concerns should some regulations be relaxed, such as the Volcker Rule for community banks. This indicates that he may be more receptive to calls for adjusting financial regulation prudently.

 

What to Expect

As the current nominee Powell has prior experience in Fed and shares a similar view to Yellen, he is likely to carry on her policies of gradually raising interest rates based on economic conditions. Thus due to current positive economic numbers such as GDP, home sales and nonfarm payroll numbers, 3 rate hikes is forecasted for 2018. Should a rate hike occur, it should be during the 4 months stated in the table below. This is because these 4 meetings will have a scheduled press conference after the meeting, which makes it easier to portray the message of the rate hike and the rationale behind it.

Usually, interest rate hikes will cause indices to fall due to increased borrowing cost for companies. However even if interest rates for the U.S. were to rise in 2018, the impact on U.S. indices may not be significant. This is due to the positive impact from the recently passed tax cut bill, which may outweigh any form of correction from the rate hikes. The interest rate hikes is also expected to cause the USD to strengthen.

 


Source: Phillip Futures

Conclusion

Generally Powell’s nomination as Fed chairman has been widely accepted by markets. Therefore it is expected that the USD may rise in 2018, as interest rates are forecasted to nominalise gradually based on the economic situation. U.S. indices are also expected to benefit, because Powell is more supportive of President Trump’s economic reforms.

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