President Trump has nominated current Fed Governor Jerome (Jay) Powell to be the next Chairman of the Federal Reserve, replacing Janet Yellen. Powell's appointment, likely to be confirmed by the Senate, represents continuity at the Fed, as he has not dissented on policy and his views have been uniformly in line with the center of the Federal Open Market Committee (FOMC).
Many of Powell’s public views on the economy and monetary policy are similar to Yellen’s, which is why we expect relatively little change in the Fed’s approach or outlook for policy. He shares Yellen’s view that wage growth shows no signs of overheating, even though the economy is at full employment. He expects inflation to rise, though like Yellen he believes it’s a bit puzzling why it’s not closer to the 2% target. Consequently, he supports gradually raising rates, provided the economy performs as expected.
The most likely policy difference between a Powell versus Yellen-led Fed is a lighter touch on financial regulation. Powell did play a key role in drafting new bank regulations after the crisis, so we expect he’ll be cautious on undertaking financial sector deregulation. However, he has supported more transparency regarding bank stress tests, relaxing some aspects of the Volcker Rule that limit the bank trading activities, and reducing the regulatory burden on small- and medium-sized banks, among other potential regulatory changes.
As Chair, Powell is likely to maintain a consensus-based approach to setting policy, following the template established by his predecessors Ben Bernanke and Yellen. 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.
In additional to naming Powell chair, Trump is expected to appoint three new members to the Fed’s Board of Governors in the first half of 2018. It’s very likely that Janet Yellen will step down as a Fed Governor when her term as Chair ends in February. That will leave three open seats, including the Vice-Chair position. Stanford professor John Taylor, who was a finalist to be named Fed Chair, is a probable candidate for the board, and could be named Vice-Chair.
While the leadership and composition of the Board will change significantly in the next few quarters, it’s unlikely to alter the path of monetary policy over that horizon. The Fed should continue to reduce its balance sheet at the pace it has already outlined. Our base case is for a 25 basis point rate hike in December and two more hikes next year, while the FOMC’s current forecast calls for three hikes in 2018. Any changes to the Fed’s forecasts and balance sheet reduction plan are more likely to stem from evolving economic conditions than a change in leadership.
Overall, we expect monetary policy under a Powell Fed to remain supportive of risk assets, and we remain overweight global equities relative to U.S. government bonds.
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