Is the new Fed chair a change in direction?

Thought of the day        

Jerome Powell is set to become the next chairman of the Federal Reserve, according to a Bloomberg report citing "four people familiar with the decision." If he is confirmed it would make Janet Yellen‘s tenure as Fed head the shortest in nearly four decades. The previous three Fed chairs were all reappointed by a president not from the party that nominated them.

While Powell’s nomination would be a departure from recent history, we would not expect any sharp policy changes under his chairmanship:

  • Continuity. Since joining the Fed as a governor in 2012, he has not dissented on policy, and his views have been uniformly in line with the center of the Federal Open Market Committee (FOMC).
  • Consensus. The FOMC decides policy, not just the chairman. Although Powell is not a trained economist, he has developed a deep understanding of macroeconomics and monetary policy. He is well liked and respected on the FOMC and understands its processes. That combination means that he should be able to create committee consensus fairly easily.
  • Caution. Powell played a key role in drafting new bank regulations after the crisis. He would be expected to pursue a policy of only cautious financial sector deregulation.

So a Fed led by Powell will raise rates only gradually, in our view. Our base case is for a 25 basis point hike in December and two more next year. We expect monetary policy to remain supportive of stocks, and we remain overweight global equities.

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