Next advantages and disadvantages of the Fed chair

Talking points on the appointment of Fed chairmen:

  • US President Joe Biden is expected to make his decision on the next Fed chairman in the coming days.
  • The term of current Fed Chairman Jerome Powell is expected to end in February 2022 if he is not reappointed for another four-year term.
  • If Powell is not reappointed, current Fed Governor Lael Brainard is seen as the most likely alternative.

Nomination season

Earlier last week, US President Joe Biden suggested he would announce his appointment as the next Fed chairman with “four days.” While that timeline was quickly pushed back to “around Thanksgiving,” the point is, we’re just in the window where an announcement from the Fed chairman is anticipated.

Under a law passed in 1977, the US president must elect one person to serve a four-year term as president (then called “president”) as well as two others to serve as vice-presidents (then called “president”). vice-president ”). While these individuals may already be members of the Federal Reserve Board of Governors in the middle of a 14-year term, they would need further confirmation from the U.S. Senate before taking on their new roles.

Thus, there is a political dimension to the appointment process; one that’s particularly acute right now with a 50-50 split in the US Senate between Democrats and Republicans.

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What do the betting markets say?

The betting favorite remains current Fed Chairman Jerome Powell. The 68-year-old has been in his current post since February 2018, when he replaced Janet Yellen, who is retiring, who later became the current Treasury Secretary in the Biden administration. Under Powell’s leadership, we have witnessed one of the fastest post-recession labor market recoveries in US economic history, and US equity markets remain near all-time highs.

PredictIt Odds for the next Fed chairman

Still, betting markets are increasingly uncertain that Powell will retain his position as Fed chairman amid a surge in U.S. inflation rates to their highest level in 30 years. Indeed, Fed Governor Lael Brainard, 59, has gained ground in estimates of who will be the next Fed chairman over the past week.

The betting markets estimate a little more than a 60% chance of Powell being renewed, while taking into account a little less than a 40% chance of Brainard being promoted.

Powell vs. Brainard: pros and cons

Financial media inundated with palace intrigue suggests that members of Biden’s Democratic Party are not too fond of Powell, a Republican appointed to the Fed’s board of governors by former US President Barack Obama, who was later raised to post of chairman of the Fed by the former American. President Donald Trump. Several Democratic senators believe Powell has been too flexible on banking regulations and has not paid enough attention to climate change as a significant economic and financial risk.

These worries gave Brainard, a Democrat, an outward but serious chance to become only the second female Fed chairman in U.S. history. Brainard is a Harvard-trained economist, having served on the Fed’s Board of Governors since 2014. Previously, she was Economic Advisor for International Affairs under the Bill Clinton administration, as well as Under Secretary of the Treasury for International Affairs under the Obama administration. .

On the one hand, Powell’s reappointment would signal continuity for the Fed at a time when communications face challenges as it navigates the post-pandemic landscape, trying to balance its dual tenure to maximize l employment while keeping inflation close to + 2% in the medium term. A reappointment of Powell might also be easier to secure, having already secured Senate confirmation in February 2018 with a resounding 84 to 13 vote – most of whom were Republican senators.

On the flip side, promoting Brainard to Fed chairman may be a signal to market participants that the Biden administration is less concerned with inflation and more concerned with labor markets and climate change (even if the latter is not part of the Fed’s mandates). She may also draw more attention to the cryptocurrency markets, having discussed the merits of central bank digital currencies (CBDCs) over the past year; Powell is rather undecided on the matter.

Who will be appointed and how will the markets react?

The point is, the appointment of the Fed chairman is a political exercise. And while it may make sense to have an economist (Brainard) in the role as opposed to a lawyer (Powell), it does not seem likely that Brainard will be able to garner enough support from the Senate Republican caucus in order to d ‘clear the confirmation threshold to become the next Fed chairman.

However, having already secured his place as a member of the Fed’s Board of Governors, US President Biden could choose to elevate him to the post of Vice President of the Fed, a seat now vacant as Randy Quarles’ tenure in office. as vice president of supervision ended in October. . A compromise in which Powell is renamed Fed chairman and Brainard vice chairman could garner the most widespread support in the equally divided US Senate.

Either way, financial markets are unlikely to react too significantly when Powell or Brainard are announced as the next Fed chair candidates. There has been little daylight between the two policymakers in recent months, with the two downplaying the spike in inflation as a transitional issue resulting from the chaotic reopening of global markets amid the pandemic.

It seems unlikely that there will be any significant and lasting movement in US stocks, the US dollar (via the DXY index), gold or Bitcoin prices, regardless of who is chosen to lead the Federal Reserve in the past. over the next four years.

— Written by Christopher Vecchio, CFA, Senior Strategist

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