Tuesday, November 23, 2021
President Biden officially nominated Chairman Jerome Powell to a second four-year term as Chairman of the Federal Reserve (Fed) and elevated current Fed Governor Lael Brainard to Vice Chair of the Committee. Before the announcement, there was speculation that Brainard could replace Powell as Fed Chair.
We view these nominations as very market friendly. Powell has done a commendable job supporting markets during the COVID-19 shutdowns and we aren’t quite through with the pandemic. We believe stability and leadership continuity is important as we continue to make our way toward the finish line of the COVID-19 pandemic. While Brainard is well qualified to run the Fed, elevating her to Vice Chair recognizes her contributions and potentially puts her in a position to take over the Chair role in four years. Both positions require Congressional approval, and we think both should be confirmed when Congressional hearings conclude sometime over the next few months.
“As we expected, President Biden chose continuity and familiarity with these Fed appointments,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Going with Powell over Brainard is what markets were expecting, so we think markets are relieved that Fed leadership uncertainty is now out of the way.”
The knee-jerk reaction in the bond market was interesting in that markets seemingly continue to shift the prospects for interest rate hikes forward. As seen on the LPL Research Chart of the Day, Treasury securities across all maturities sold off with two-year tenors among the most (negatively) impacted. Now, two-year Treasury yields are at the highest level since the pandemic began. Short maturity securities are the most impacted by changes in monetary policy. Moreover, markets are pricing in nearly three rate hikes next year with the first rate hike expected in June, which is much more aggressive than the Fed has indicated.
President Biden still has three open Fed Board of Governor positions to fill, so we’re a long way from knowing for sure how Fed policy may change over the next few years. However, we would expect Biden to select governors on the dovish side of the spectrum. That said, the 2022 voting rotation with regional Fed Presidents may impart a hawkish lean to the FOMC overall, offsetting some of the dovish bias from Biden’s appointments. The rotation replaces three solidly dovish and one strongly hawkish voting members with two strongly hawkish and two solidly hawkish officials. Monetary policy is managed at the national level, so while the regional presidents will no doubt have influence, we continue to think the Fed will be more accommodative than markets are currently expecting. In addition, with the announcements today, leadership at the top of the Fed should be seen as being supportive to the economy and thus supportive for markets.
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