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.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking # 1-05215960