Here’s how Powel’s appointment could impact the U.S. economy as well as the strength of its currency.
On Thursday, U.S. President Donald Trump is expected to nominate Jerome Powell, the Federal Reserve’s Governor as the next chairman of the U.S. central bank, said a source familiar with the matter at hand.
There has been little market reaction to the news. This could be largely because Powell had been widely reported to be the front runner for the post.
“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.
However, if Trump were to select Stanford economist John Taylor for the post, it could trigger a significant change in the Fed’s policy and in turn could see a big market reaction, said Nolte.
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 being in line with Janet Yellen, the current Fed Chair.
Although Janet Yellen’s term as the Fed’s chair expires in February 2018, she is however entitled to remain a governor on its board until 2024.
Significantly, Powell is viewed as unafraid of reversing the current plan to sharply reduce the Fed’s $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,” said analysts at RBC Capital Markets in a research note.
Market watchers have attributed to a return to steady economic growth, healthy corporate earnings and the potential for tax cuts under Trump, as the reason for the rise in equities in recent months.
However they have also highlighted that a change in Fed leadership is likely to be a risk for the bull market run. So, if Yellen is not reappointed is likely to create ripples in the market.
Unlike the bull run in the market, the value of the greenback has depreciated with Trump struggling to get economic agenda off the ground.
Analysts opine that if Powell is named as the Fed helm, the USD is likely to sink lower as opposed to either Taylor or former Fed Governor Kevin Warsh coming to the post, since they are likely to raise interest rates more quickly.
However, Powell’s appointment is likely to boost bond prices and lower yields, since he subscribes to Yellen’s strategy of a steadier pace of hikes in interest rates.
Many analysts have cautioned against betting too heavily on a Powell-led Fed since his views are not yet clear and thus have still to be gauged.
“We saw Powell as a bit more difficult to read, as he doesn’t appear to have as strong of an overarching monetary policy ideology as say, Yellen or Taylor,” said NatWest Markets strategists in a recent note while adding that they expected a “slightly dovish” reaction to his appointment.