Market Comment: Trump chooses stability: Powell nominated as Federal Reserve Chair

News item -

Donald Trump has nominated Jerome ‘Jay’ Powell, a current member of the Federal Reserve Board of Governors, as the next Chair of the US Federal Reserve. If approved by the Senate, Powell will take the helm in February 2018, replacing Janet Yellen.

Stability at the Fed

Fidel Kasikci, ABN AMRO Senior Fixed Income Portfolio Manager, sees the naming of Powell as a sign of stability for Federal Reserve monetary policy. “Powell has fully supported Yellen’s decisions during her chairmanship,” says Kasikci. “The nomination generally represents the status quo, given the alignment with Yellen.”
Powell joined the Fed in 2012, when he was picked to fill the unexpired term of a resigning member. He was reappointed in 2014 for a term that would expire in 2028. Before joining the Fed, he was a visiting scholar at the Bipartisan Policy Center, a Washington think tank, and from 1997-2005 he was a partner at the Carlyle Group, a private-equity group. He had previously served as Undersecretary of the Treasury under President George H.W. Bush, with responsibility for financial institution policies.

Market reaction is muted

Market reaction has been relatively mild, since yesterday when news of the nomination leaked to the press. “US ten-year Treasury yields have seen only muted trading, with a tightening of around three basis points,” notes Kasikci. “Given the odds clearly pointing towards Powell as the new Chair, his nomination has also been digested quickly by stock investors, who expected the appointment, as nothing else than an extension of the accommodative Fed policy under Janet Yellen. Their focus has shifted more towards Trump's tax proposal.”

Slow and gradual rate hike cycle

“The appointment of Powell,  signals continuity of Yellen's gradual and cautious approach at the Fed. It is a sign of stability,” says Kasikci.  ABN AMRO expects the slow and gradual pace of the US rate hike cycle to continue, with two hikes occurring between now and year-end 2018. The strength of the US economy, however, increases the likelihood of more rate increases. For now, ABN AMRO expects the Fed’s key policy rate to be 1.75% by year-end 2018, when US ten-year Treasury’s are expected to be yielding 2.5%.