This morning, President Biden renominated the current Fed Chairman, Jay Powell, for another 4-year term. Lael Brainard, who was also in the running, will become the next Vice Chair, replacing Richard Clarida. This keeps consistency of the top dog at the Fed during a time of heightened inflation and increased monetary policy. Biden praised Powell’s leadership throughout the pandemic and his swift actions to help rescue the economy. Now his task will be protecting the consumer against inflation, as the Fed’s second mandate, full employment, will continue to take a back seat.
Following the announcement, Treasuries sold off (yields higher), specifically on the long end of the curve while the dollar strengthened, and equities lifted higher. With a Powell-led Fed, we expect the speed of the QE taper to follow the data, likely speeding up if inflation prints continue at the pace of the October print with interest rate hikes to shortly follow the taper (June at current pace). The market believes this action will keep the Fed in control of inflation. While the market is expecting a more hawkish response to current inflation, time will tell if it will be enough, as Powell is well established in the dovish camp of FOMC policy.
The move to choose Powell proves the reality of inflation and while the selection of Powell over Brainard was likely difficult politically for Biden, given the push from progressive Democrats, we believe it was the right move. Biden likely delayed the nomination as he met with senators across the political spectrum to assess whether Brainard could be confirmed for the position. Ultimately, he concluded that it would be difficult to push her across the finish line. Markets made their statement of wanting to see the Fed do its job, i.e., focusing on addressing monetary policy, employment, and inflation rather than political agendas such as climate change and income inequality (market driven decisions vs politically motivated decisions). We see the renomination as a clear message from the markets that the best person for the job is already there.
We expect Biden to nominate the remaining open seats (3 open seats) in early December. As progressives are likely displeased with Powell’s renomination, we wouldn’t be surprised to see these seats influenced towards more aggressive progressives. Also, no decision has been made on the Vice Chair of Supervision which could line up well with Brainard given her pro-regulation stance. We will also get our last look at FOMC minutes for 2021 which could enlighten the markets on the pace of tapering considering the continual inflationary pressures present. Given Powell at the helm, we know that he will continue to focus on data-driven decisions, thus, he will have a lot more clarity before he has the ability to change the cadence of tapering in January.
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