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Trump picks Powell to succeed Yellen as Fed chair

Trump picks Powell to succeed Yellen as Fed chair

Surprising no one US president Donald Trump nominated Jerome Powell to be the next chair of the Federal Reserve, when Janet Yellen’s term comes to an end in February 2018.

Powell, who is known as Jay, led a wide ranging field of candidates for the position, which included Kevin Warsh, Gary Cohn and Yellen herself.

The move to nominate Powell means Yellen will not serve a second term as chair of the Fed, making her the shortest-serving chair since G. William Miller who held the position from 1978 to 1979. She is the first chair in recent history not to serve a second term in the position.

Despite being critical of Yellen during his election campaign, Trump had been more cordial towards the departing chair since taking office and praised her during his announcement of Powell’s nomination.

‘We have been working together for 10 months and she is absolutely a spectacular person. Janet, thank you very much. We appreciate it,’ he said in a press conference in the White House Rose Garden.

Powell is a Republican who trained as a lawyer but went on to enjoy a successful career as an investment banker. 

Powell’s nomination was widely anticipated by the markets, and investors have broadly tipped him to keep monetary policy along the same lines as Yellen, while acknowledging he has generally been more dovish than his predecessor.

The central bank is expected to announce one more rate rise in December, and hike up to three times next year. It also plans to continue unwinding its $4.5 trillion balance sheet along the lines set out earlier this year.

Pimco strategic advisor Richard Clarida said: ‘We believe Jerome Powell is a smart choice for Fed chair. He is likely to provide continuity in the monetary policy framework developed by the Yellen Fed for a gradual normalization of the policy rate and a predictable reduction in the Fed’s balance sheet, though in the longer term the Powell Fed will have some critical decisions to make about the ultimate destination for both the rate and the balance sheet.'

Peter Palfrey, co-manager of the Loomis Sayles Core Plus fund, agreed.

‘Markets will likely consider Powell as slightly more dovish than Yellen, but he has been fairly centrist in more recent policy discussions,’ he said. ‘We expect the direction of current Fed balance sheet and monetary policy to stay on course over the nearer term.’

‘I believe that a Powell appointment could translate into some additional treasury yield curve bull steepening in the near term, with investors looking for a continuation of a very gradual and well-telegraphed tightening of Fed policy over the next 12 to 15 months. However, Powell has been heavily favored in betting markets, so that trade is likely already largely discounted.’

He added that the appointment could be a boon for treasury inflation protection securities (Tips).

‘Powell should put a bit more risk premium into the long end of the curve and be good for inflation assets like Tips,’ he said. ‘Of course, longer term, economic and inflation data will drive yield curve direction and shape, and ultimately risk market and Tips performance.’

Regulation watch 

One area where Powell has been tipped to differ from Yellen is his attitude to financial regulation and he is expected to be receptive the idea that Wall Street was over regulated during the Obama administration.

Loomis Sayles chief economist Brian Horrigan said: ‘I think we’ll see a difference in regulatory policy. Powell has expressed skepticism about the regulatory expansion of finance during the Obama years. Dodd-Frank does give the regulatory agencies leeway in interpreting and implementing regulations.’

While Powell is not seen as a huge departure from Yellen for now, the longer-term direction of Fed policy could shift due to further appointments to its board of governors early next year. 

Trump has three more open seats on the board with a possible fourth if Yellen decides to step down from her position when she leaves the role of chair. 

TCW manager Bryan Whalen recently warned that many investors had underappreciated what this change in line-up could mean for monetary policy in the US going forward. 

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