Meet the New Fed Chairman
Jerome Powell is the new Chair of the Federal Reserve replacing Janet Yellen. We expect him to continue the dovish policies of Janet Yellen. A dovish policy refers to a looser, more accommodating policy with the goal of stimulating the economy. Powell has been one of the seven members of the Federal Reserve Board of Governors since 2012. He was on the board for the entirety of Janet Yellen’s term from 2014 to 2018.
One of the major monetary tools of the Federal Reserve is to set the benchmark lending rate, also referred to as the federal funds rate. The benchmark lending rate is the interest rate depository institutions charge each other for overnight loans of funds. The current benchmark lending rate is in a target range of 1.25 percent to 1.5 percent. Currently, the futures market is forecasting approximately two .25 percent interest rate hikes for 2018. Since the peak of the market on January 26th the odds of a September and December hike have dropped. The market is expecting rates to rise at the March meeting with odds of a hike at 78%.
On February 13th, Powell released his first public statement since replacing Yellen. His comments echoed previous comments from Yellen and gave the market the impression that he will continue the gradual process of normalizing interest rates. Here are some of the more important comments he said:
- “The global economy is recovering strongly for the first time in a decade. We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives.”
- “Monetary policy has continued to support a full recovery in labor markets and a return to our inflation target; we have made great progress in moving much closer to those statutory objectives.”
- “We will remain alert to any developing risks to financial stability.”
In September of 2017 Powell voted in favor of beginning the multi-year process of winding down the central bank’s $4.5 trillion portfolio. This vote with Yellen and previous comments have convinced the markets that he plans to continue the dovish policies of Yellen. The belief in Powell’s dovish stance explains why the chance of a September and December rate hike have dropped with the recent stock market correction. Some market participants view this as an extension of the Greenspan put. The Greenspan put, named after former chair Alan Greenspan, is the belief that the Federal Reserve will always step in to protect the markets by cutting rates and purchasing bonds to help money flow in to the stock market.
In a June 2013 speech Powell said, “some volatility is unavoidable, and indeed is a necessary part of the process by which markets and the economy adjust to incoming information.” In the same speech he said “[i]f the performance of the economy is weaker, the Committee may delay before moderating purchases or even increase them. If the economy strengthens faster than the Committee anticipates, the pace of purchases may be moderated somewhat more quickly. The path of purchases is in no way predetermined; we will monitor economic data and adjust our purchases as appropriate.” These comments could just have easily been said by Janet Yellen. For most market participants these comments have been considered dovish and create the possibility of a Powell put for the market. With a Powell put the market expects a slowdown or a complete stop in the pace of rate hikes if the stock market has a large correction.
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