By David Randall

NEW YORK, (Reuters) – While Jerome Powell is still the favorite for the position of Federal Reserve Chairman in the end, some investors may consider the possibility that there might be a surprising change.

Following sharp criticisms from progressive Democrats regarding Powell’s performance, and an accounting scandal among Federal Reserve staffers, Powell’s chances in betting markets has fallen. [L1N2R020J]

Online betting website PredictIt now gives https://www.predictit.org/markets/detail/7398/Whom-will-the-Senate-next-confirm-as-Chair-of-the-Federal-Reserve Powell a 76% chance of being confirmed by the U.S. Senate, down from a 90% chance on September 12 although up from a 61% chance in late September, while the odds that Federal Reserve Governor Lael Brainard will be nominated have increased to 18% from a low of 6% in September.

Brainard, who was elected to the Fed board by President Barack Obama in 2014. She is often viewed as being more cautious than Powell because she pushes to maintain super-easy monetary policy while there are more job recovery efforts. https://www.reuters.com/business/feds-brainard-more-progress-recovery-ahead-though-still-far-goals-2021-06-01

If Brainard is elected as Fed Chair, it could continue its dovish policy and delay the timeline of the central bank raising interest rates past 2022. However, analysts and investors warned that a string of rate rises could occur if there’s high inflation and the Fed remains behind the curve.

Paul Herbert, Harbor Capital Advisors’ Managing Director, stated that a Brainard Fed could take a completely different approach to monetary policy. He would push back the initial rate increases and follow with shorter tightening cycles. Herbert said Powell will be renominated, but would prefer to keep shorter-term bonds longer in the event of a Brainard Fed.

Although the White House does not have a set time frame for President Joe Biden’s decision regarding Fed personnel, it has stated that Biden will “engage with his senior economic staff in a thoughtful and thoughtful process…in an expedited manner.” According to sources familiar with the matter, although Biden hasn’t made any decision yet, some of his closest aides support Powell.

Before the Senate Banking Committee votes, the nominee will be reviewed by Biden. A simple majority is required for the vote to be in full Senate.

Powell, who is Republican, has been more successful than any Fed Chair in cultivating relationships on Capitol Hill. She meets with representatives from both sides of the aisle regularly. Jon Tester, a Montana Democratic senator, has endorsed Powell, and Elizabeth Warren, a Massachusetts Democrat has stated that she will oppose him. Most observers believe Powell would win the support of all the Republicans, even some.

Nicholas Colas is the co-founder and chief executive officer of DataTrek Research. In a research note, he stated that “history can be used as a guide,” adding that earlier announcements had been made in October or November.

Former President Donald Trump nominated Powell on Nov. 2, 2017, U.S. Treasury secretary Janet Yellen was also nominated in Obama’s nomination on October 9, 2013. President George W. Bush nominated Ben Bernanke on October 25, 2005, and renominated him on August 25, 2009.

Colas wrote that they continue to gaze in admittedly morbid fascination on the PredictIt odds of the Federal Reserve Chair. He also stated that “we believe Powell will retain his job.” It is absurd to change the horses halfway.

The Federal Reserve is likely to have tapered its emergency-level support of bond markets by then, but a change in Fed policy would increase market misinterpretation of it’s outlook for next year. Jason England, Janus Henderson global bonds portfolio manager, stated that this was unlikely.

He said, “You’d see volatility on the markets because of less certainty surrounding monetary policy.”

Biden’s choice to name a Fed chair nominee is coming as moderate and progressive Democrats battle over the landmark infrastructure bill and reconciliation bill, which are central to the Obama administration’s economic agenda.

Warren asked the U.S. Securities and Exchange Commission for an investigation into transactions made by U.S. central banks, including two Fed bank chiefs who quit after public outcry.

“The stock ownership investment scandal situation involving the Fed, that’s probably what’s influencing that the odds the most,” said Scott Kimball, co-head of U.S. fixed income at BMO Global Asset Management. “The bottom line is he’s done a very good job,” he said.

According to Mike Gladchun (director of U.S. rate trading at Loomis Sayles), the Fed’s accommodative attitude will not change significantly no matter who Biden nominates Powell and Brainard.

Powell said that it was important to understand how dovish Powell’s Fed is.