Powell for Federal Reserve chair could support stocks bull market
NEW YORK: President Donald Trump’s expected nomination on Thursday of Federal Reserve Board Governor Jerome Powell to be the next chair of the US central bank likely will provide investors with some assurance of continuity in monetary policy, supporting the eight-year long stock market rally, but perhaps dealing a blow to those looking for a stronger US dollar.
Trump plans to nominate current Federal Reserve Governor Jerome Powell as the next chair of the US central bank, a source familiar with the matter said on Wednesday. The announcement is expected on Thursday.
There was little market reaction to the news, earlier reported by the Wall Street Journal, which was posted after the close of regular trading on Wall Street on Wednesday.
Powell had been widely reported over the last week to be the front runner.
“You could get a little bit of a pop (in stocks) now that it’s finally announced, but I don’t think it’s a big surprise and it’s not a big shift in policy,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
Nolte said the bigger risk would have been a shift to one of the contenders seen as disagreeing with current Fed policy, such as Stanford economist John Taylor.
Powell, who has been a Fed governor since 2012, has yet to cast a dissenting vote against the Federal Open Market Committee’ s decisions on monetary policy.
His views are seen as in line with current Fed Chair Janet Yellen, so his appointment appears to offer investors more certainty on the Fed’s likely policy path.
Janet Yellen’s term as Federal Reserve chair expires in Febru- ary 2018, though she is entitled to remain a governor on the board of the Federal Reserve until 2024.
Importantly, Powell is viewed as unafraid of reversing the current plan to sharply reduce the Fed’s US$4.5 trillion balance sheet if the economic or market outlook were to change.
“We can split hairs on the nuances but bigger picture, he will practice a patient approach to policy which is identical to what is in place now,” RBC Capital Markets said in a recent research note.
Critical to stock investors is the continuation of the so-called ‘Fed put,’ in which investors in stocks have assumed the Fed effectively provided insurance against a market fall, by flooding money markets with cash and buying government bonds to keep interest rates low whenever economic growth slumped or geopolitical risks rose.
Under Ben Bernanke’s chairmanship of the Fed, the central bank helped to navigate the economy out of the 2008 financial crisis until February 2014 when he was succeeded by Yellen.
During that time the US benchmark S&P 500 stock index rose nearly 40 per cent. Since Yellen took over in 2014, the index has climbed nearly 50 per cent to sit at a record level.
Market watchers have pointed to a return to healthy corporate earnings, steady economic growth, and the potential for tax cuts under Trump as the reason for the rise in equities in recent months.
But given the importance of low interest rates to the eight-year bull market in stocks, investors have also cited a change in Fed leadership as a risk to the rally. Just the fact that Yellen was not reappointed is likely to create some queasiness. — Reuters