William HoffmanUS president Joe Biden told reporters on Tuesday that he expects to make his pick for chair of the Federal Reserve by week's end.
The race is coming down to two candidates: the sitting chair, Jerome Powell, and board member Lael Brainard. Senate Banking Chair Sherrod Brown confirmed earlier news reports this week by saying a pick was imminent and that while he did not know who the pick will be, he said he expected it to be one of the two front runners.
“The consensus view is Powell gets reappointed and the tapering continues along the same roadmap and rates are raised sometime next year,” David Knutson, head of US fixed income at Schroders, told Capital.com. “If Brainard gets in, it would be a surprise, and we could see yields going up in the long end and coming down on the short end.”
Market reactions
One school of thought is that no matter who takes the role, both candidates are broadly similar when it comes to policy choices and thus markets will be unaffected. Or as Knutson put it – meet the new boss, same as the old.
Prediction markets gave Brainard as much as a 47% chance of securing the nomination on Tuesday but quickly fell back to around 35% on Wednesday. Still, Brainard’s odds are growing from last week when markets were giving her a 25% chance of being the nominee and well up from a month ago when she was receiving just an 18% chance.
“For what it's worth, the volatility in prediction markets was not similarly apparent in financial markets,” BMO fixed income strategists Daniel Krieter and Daniel Belton wrote in a report obtained by Capital.com. “The two candidates are broadly similar from a policy perspective, and the eventual regulatory regime is unlikely to be impacted by the personnel.”
Dovish rate policy
But another mindset emerging is that Powell, who was selected by former President Donald Trump in 2018 to succeed Janet Yellen, is more hawkish than Brainard on rate policy.
By that market participants mean Powell is more likely to raise rates faster and remove the accommodative policy put in place during the pandemic. Meanwhile, Brainard is more likely to keep rates lower for longer – possibly not supporting a rate rise until 2023.
“That is funny to say because Powell is very dovish, but relative to this political landscape he’s starting to look hawkish,” Knutson said. “Here is a guy that has pumped more liquidity into the system than anyone ever in the history of central banks and yet he is looked at as the more hawkish option.”
Even if Brainard proves to be more dovish in advocating for rate increases, several other changes coming to the makeup of the Federal Open Market Committee (FOMC) suggest a strong dovish lean regardless of who’s in the chair, said Rich Sega, global chief investment strategist at the asset management firm Conning.
"Replacements for (Richard) Clarida, (Randal) Quarles, (Eric) Rosengren, and (Robert) Kaplan along with a new vice chair for supervision all speak to a very measured response to inflation," Sega told Capital.com. "So while the markets would welcome the stability of Powell’s renomination, the path forward under either of the current leading candidates I suspect would be quite similar."
Banking policy
When it comes to possible banking regulations, Powell and Brainard’s roles are reversed to where market participants feel she will be more hawkish.
Brainard favours tighter reins on the largest banks while Powell has rolled back regulations on large financial institutions during his tenure. His policies have led progressive leaders such as Sen. Elizabeth Warren, a member of the Committee on Banking, Housing, & Urban Affairs, to publicly oppose his nomination.
Specifically, Brainard is a proponent of countercyclical capital buffers (CCyB), which would force banks to set more money aside in times of a strong economy in order to prepare for a downturn.
“The additional capital implied by the CCyB across the system can be released when conditions deteriorate to ensure the ability of large banks to lend into a downturn,” Brainard said in a 2018 speech. “A number of countries have raised their CCyB setting above zero, and we can learn from their experiences, which have generally been positive.”
Long shots
While the nomination is largely considered a two-horse race at this point, there are some outside contenders.
Roger Ferguson, former head of the Teachers Insurance and Annuity Association (TIAA) and Fed vice chair, is speculated to be under consideration after it was announced this week he would not take the helm of Apollo Global Management, as was previously announced in October.
Raphael Bostic, president of the Federal Reserve Bank of Atlanta, is currently third among betting markets but with just around a 2% chance.
Several other FOMC members are embroiled in controversy over stock trading during their tenure that has caused the ousting of some members.
