US stock market’s future in Trump’s hands
nvestors awaiting the nomination of the next Federal Reserve chair are hoping whoever is nominated pursues the same monetary policy that has supported rising stock prices for the past nine years.
Led by Janet Yellen since 2014, the Fed is about to allow its $4.5 trillion portfolio of securities to shrink, and in late 2015 it began raising interest rates from the low levels seen after the 2008 financial crisis. A new Fed chair who argues for tightening monetary policy more aggressively is seen putting economic growth at risk, along with corporate earnings, and the long stock market rally.
A faster rise in short-term interest rates would likely flatten the yield curve, narrowing the gap between short and long term debt yields, which could crimp bank profits and strengthen the US dollar, hurting exporters’ sales.
US President Donald Trump has selected a pool of five candidates from which to choose the next Fed chair: current Fed Chair Janet Yellen; Trump’s chief economic adviser, Gary Cohn; former Fed Governor Kevin Warsh; current Fed Governor Jerome Powell, and Stanford University economist John Taylor.
Cohn and Powell are the two most likely to follow current Fed policy, while Taylor and Warsh are seen likely to push for raising interest rates at a faster clip and to argue for a quicker run-down in the bond portfolio accumulated after the 2008 crisis.
Most important to stock investors is the continuation of the so-called “Fed put”, or the expectation of easy monetary policy as stock prices fall that first came into prominence under former Fed Chair Alan Greenspan.
For years investors in stocks have assumed the Fed granted them a put option, effectively providing 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 Bernanke, the Fed helped to navigate the economy out of the 2008 financial crisis until 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 from him in February 2014, the index has gained a further 45 per cent.
“I think in their hearts every modern Fed chair knows that the institution’s mandate has to include stock prices,” said Nicholas Colas, co-founder at DataTrek Research in New York.
President Trump has praised the record highs in US stock prices, perhaps making it less likely that he would nominate someone who would deviate markedly from current Fed policy.
Following is a summary markets reactions to the of each name in Trump’s alphabetical order): GARY COHN
A Cohn nomination would “be met positively,” said Walter Todd, chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina. “The perception is that he is market friendly.”
Cohn is currently director of the White House National Economic Council and is a former president of investment bank Goldman Sachs. JEROME POWELL
A governor on the Federal Reserve board since 2012, Powell has yet to cast a dissenting vote against the Federal Open Market Committee’s decisions on monetary policy. His appointment would remove uncertainty and would likely see Fed policy continue little changed.
“Powell would follow very close to Yellen and would be a great choice for the market,” said Paul Zemsky, chief investment officer, Multi-Asset Strategies and Solutions at Voya Investment Management in New York. JOHN TAYLOR
Famous for a formulaic approach to monetary policy, including the so-called Taylor Rule, he is seen as likely to tighten monetary policy more quickly. of possible nomination shortlist (in