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Powell Pick Seen Positive for Risk Despite Knee-Jerk Selloff

Jerome Powell, chairman of the U.S. Federal Reserve, speaks while Lael Brainard, governor of the U.S. Federal Reserve, left, listens during a Fed Listens event on "Perspectives on Maximum Employment and Price Stability" at the Federal Reserve in Washington, D.C., U.S., on Friday, Oct. 4, 2019. Powell said that the U.S. economy is in a good place though it faces some risks.
By Bloomberg
23 Nov 2021 0

Jerome Powell getting a second term as chair of the Federal Reserve is positive for risk assets, despite the knee-jerk selloff to his renomination, according to strategists.

Stocks should benefit from a reduction in uncertainty and the market should calm in the next few days is a key takeaway from reaction by market participants. The focus now moves to the possibility of a faster-than-expected Fed tapering program, which should support the dollar, they said.

Stocks and Treasuries fell after President Joe Biden’s decision fueled bets that the Fed might tighten policy more quickly. The dollar climbed to its highest since September 2020, the yen fell past 115 per dollar for the first time since March 2017 and gold dropped.

10-year Treasury yields jumped with dollar on Fed Chair renomination

Powell, who has served as chair since 2018, is considered to be slightly more hawkish than rival Lael Brainard and is seen likely to maintain his policy stance going forward. Investors expect the central bank to raise interest rates from near zero in June, according to pricing in futures markets.

Here’s a selection of comments on the outlook for markets:

Less Uncertainty Positive For Risk Assets

JPMorgan Chase & Co. strategists led by Marko Kolanovic:

“Powell’s reappointment reduces uncertainty, and hence should be a positive for risk assets. Historically, markets try to test new Fed Chairs, so we believe this outcome will be avoided. Additionally, Powell’s experience from 2H18, where policy tightening contributed to the strong market selloff into year-end, will likely result in a cautious approach to liftoff next year.”

JoAnne Feeney, partner at Advisors Capital Management LLC

“Continuity is a good thing, it does remove some of the uncertainty and the messiness that Senate hearings really would create for the market so overall positive and this ongoing emphasis on the independence of the Fed is actually a really good thing for the U.S. economy and our position in the global economy and that makes it a really positive backdrop for equity investing. But clearly folks built in now higher chance of earlier increases in interest rates, potentially faster tapering, which would tend to reduce the multiples on particularly higher multiple stocks.”

George Ball, chairman of Sanders Morris Harris:

“Powell’s renomination removes a potential negative from the markets and provides the certainty that investors crave. Powell is sound, tested, respected and familiar to markets.”

“While Powell’s continuance as Fed Chair will not spark a major fresh move upward in stocks, replacing him could have triggered major downward pressure on stocks, as investors dislike uncertainty and the unknown. Replacing Jerome Powell would have sent a psychological signal that the progressives are in power, which would have been unsettling to markets.”

Dollar Can Remain Firm

TD Securities strategists including Jim O’Sullivan:

“We think Powell’s renomination leaves the dollar supported for now despite less broad-based appeal. We think the dollar can remain firm against the funders as the prospect of a faster taper remains a risk the market is chewing on.”

“We continue to believe that history is being repeated, with markets too quick to price in rate hikes, with slowing in growth as well as inflation in 2022 likely to allow Fed officials to be patient in their quest for maximum employment. That said, we are not expecting the data to suddenly weaken significantly in the next two months, so pressure on Fed officials to at least sound/look a bit more hawkish could only increase in the near term, including in confirmation hearings and in the December dot plot.”

What's Priced In Now

Chris Weston, head of research with Pepperstone Financial Pty:

“The USD bulls have appreciated the renomination of Jay Powell as Fed chair and Lael Brainard as vice-chair. The outcome was not unexpected by any means, but the market has unwound hedges against a more ‘dovish’ personnel shift and a potential Brainard appointment, and the idea of policy continuation has seen the potential for a June 2022 rate hike priced at 96%, with 2.8 hikes priced through 2022.”

Less Dovish But Calm Will Prevail

Wells Fargo strategists including Mike Schumacher:

“The direction of the market moves is intuitive and in line with our expectations, but we look for the market to calm over the next day or two.”

Philip Marey, senior U.S. Strategist at Rabobank,

“Powell is seen as less dovish than Brainard and has a less strict approach to regulation.” Still, he added that “the difference between the two is marginal” and “with inflation being more persistent than expected, she too would have had to address the inflation problem.”

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