If Biden picks Brainard over Powell for Fed chief, expect an immediate market impact
Federal Reserve Chairman Jerome Powell takes photos with Fed Governor Lael Mindard (L), at the Federal Reserve Bank of Chicago in Chicago, Illinois U.S.A, on June 4, 2019.
Ann Saphir | Reuters
If Lael BrainardNamed Federal Reserve Chairman, financial markets could price in a more conservative central bank as the first move.
This means that the Fed will likely take more time to increase interest rates and tighten its policy than it did under Fed Chairman. Jerome Powell.Trades currently expect the Fed to raise rates during the second half next year after it has ended its bond-buying program.
Powell had been expected to be nominated for the chairpersonship again until recently. but President Joe Biden has now interviewed both Powell and BrainardHe is likely to announce the news by this weekend.
Brainard seems a little more cautious than the market. There isn’t likely to be a major difference between the two candidates. Powell is most famous for his market trust, confidence, and track record in doing what is right, despite political pressure,” Ed Mills (Washington policy strategist, Raymond James) said.
Economists, investors and others perceive Brainard as being more political than she actually is. Mills stated that she was seen as politically because of the donation she made to Hilary Clinton’s presidential campaign in 2016.
Peter Boockvar (chief investment officer, Bleakley Global Advisors) stated, “Powell will I believe be much less concerned about midterm election in determining when they need to raise interest rates,”. While I’m not suggesting that Brainard would do this if she was in her seat, that perception is likely.”
Stocks are not likely to react strongly to the choice of one candidate, however financial markets may.
Brainard nominating committee: Market impact
Boockvar, along with others, do not anticipate any market reaction to Powell if he’s nominated for another four years. But, it might be different when Brainard is involved.
“I believe you will get a 10-minute bounce in the [stock]Market if Brainard is granted the appointment. “You’ll get more than a 10-minute response in Treasury market where you’ll notice a steepening yield curve.
According to Bond strategists, if Brainard is elected, inflation-related instruments like Treasury-inflation-protected securities could move higher if market expectations rise. Inflation concerns could lead to a wider spread in the yields between shorter Treasury notes, such as 2-year Treasury notes and 10-year Treasury notes.
Brainard, aged 59, is a Federal Reserve Board governor. She was previously Under Secretary of Treasury for International Affairs under the Obama administration.
Since 2018, Powell, a 68-year old man, has served as Fed Chairman. Former private equity executive and Republican, Powell was elected to the Federal Reserve Board in 2012 by President Barack Obama. He then became Chairman by Donald Trump.
Mills stated, “The reason I keep returning to Powell, putting on my political hat, is because Biden would be responsible for any negative consequences that result from monetary policy. Even more if he changes the Fed’s top brass.”
Banking is more challenging
Progressives within the Democratic Party who support tougher bank regulation have backed Brainard for the chairship.
Powell still makes sense to me, even if he seems the most straightforward from a confirmation perspective. Isaac Boltansky (director of policy research, BTIG), stated that Powell would provide coverage for progressive nominees who will fill the remaining slots.
Biden would be allowed to nominate three more Federal Reserve board members. Powell may resign if he is not nominated. Richard Clarida, Fed Vice Chairman, will be retiring in the early 2022. Fed Vice Chairman for Supervision Randal Quarles recently resignedThey became effective on December 31st. A vacant seat was also available on the board.
Brainard will also likely be considered for the Clarida position or the Quarles one.
Two weeks ago I believed that Chairman Powell was the best candidate to be reappointed. But now, I am not certain. It seems like the odds are falling. Michael Arone (chief investment strategist, State Street Global Advisors U.S. SPDR) stated that higher inflation readings and trading scandals are hurting, as well as Trump’s appointee status, making him an easy target for Trump administration.” The fact that it is taking so much time and all of these things combined, suggests to me that the chances of him being reappointed are decreasing.”
Grant Thornton’s chief economist, Diane Swonk, stated that Brainard may be perceived as less dovish by the market.
Powell and her might have a faster pace on climate change. Powell, however, was much quicker at embracing it. “The other problem is that she is much more open for cryptocurrency to the Fed. That’s what I know the most about them,” she stated. He’s not averse to catching up with other central bankers. Since a long time, she has been actively involved in the fintech and digital spaces.
Swonk indicated that Powell and Brainard are equally competent. However, she prefers consistency given the difficulties facing both the Fed’s economy and Fed.
Swonk explained that this is going be difficult navigation. The Fed’s will need everyone on deck. “Anything that is certain at this stage in the game can be good. This is why it’s important to maintain continuity. People perceive her as [more dovish]Although it might be incorrect, it can be very significant.
Michael Schumacher (Wells Fargo director rates) said that it was unclear if there is an assumption in the market for Brainard’s nomination. Although they were down Wednesday, Treasury market 5-year breakevens rose 6 basis points over a week. These breakevens, which are currently at 3.16 percent, indicate traders that they expect inflation to average 3.16% in the next five year. It was at 2.87% the day prior to the Fed’s November 2nd statement and briefing.
Arone stated that bank stock may indicate concern regarding Brainard’s role in the new position. Major banks like JPMorgan, CitigroupAnd Bank of AmericaWednesday afternoon saw a drop in.
She might be more aggressive on climate change and banking regulation, as well as the gap in wealth. Arone stated that this is where Arone will look to stamp her mark on the chairman’s job. These are areas they are different, which is why progressive Democrats support her nomination. Powell’s failure would come from his misinterpretation of inflation. Her policies would not be able to reduce inflation, however, should they get her in.
Sam Stovall is chief investment strategist at CFRA. Dow Jones Industrial AveragePowell’s annual compounded rate of growth was 11%.
He said, “That places him in the middle among the 16 Fed Chairs since 1914.” All Fed chair members had a median annual compounded growth rate of 8.5%. Daniel Crissinger (1923-1927) was the best, with 17.5% growth, followed closely by Paul Volcker (13.4%, 1979-87).
Stovall said, “If Powell’s renominated,” we would likely see stocks and bonds moving higher. Brainard could bring uncertainty to the table, which may initially prove negative for stock prices. However, her perception of dovishness might be positive for stocks. Stovall points out that the Dow posted an almost 4% median increase in its first six months under a Fed Chair and that it has increased two-thirds of this time.
“Bond yields may move slightly higher.” Stovall stated that we already know the likely trajectory of tapering and the date when the first rate rise is most likely.” If Brainard is chosen, either the equity markets go up more than with a Powell Renomination or they stagnate.”
Jim Caron of Morgan Stanley Investment Management said they would have very similar policies and that market movements may be marginal if Brainard was nominated. Caron stated that neither one of them would make a significant difference. It’s not as if you are going from being a hawk into a dove. It’s not about changing your philosophy, but changing your leadership.