US: Powell expected to be nominated to succeed Janet Yellen as Fed Chair - HSBC

Fed Governor Jerome Powell is expected to be nominated to succeed Janet Yellen as Fed Chair in February 2018 and this outcome would imply likely continuity in US monetary policy; a lighter touch on bank regulation, however, is possible, according to analysts at HSBC.

Key Quotes

“The media has reported today that President Donald Trump intends to nominate Jerome Powell on 2 November as the next Chair of the Federal Reserve (Wall Street Journal). If confirmed, we believe Mr. Powell’s appointment implies continuity in monetary policy, with only modest rate hikes likely in the year ahead. We also anticipate a continued, gradual reduction of the Fed’s balance sheet. Longer term, Mr. Powell would have to guide the Fed to a long-run policy framework. As part of quantitative easing, the FOMC adopted a new policy framework that uses administered interest rates to influence financial conditions. Whether the Fed continues with this system or goes back to the “reserve scarcity” system is a decision that has to be made within the next few years.”

“With Mr. Powell as Chair, we believe the outlook for Fed policy would remain the same. We expect that the FOMC will raise the federal funds rate 25bp in December, an increase that is already widely expected in financial markets. With inflation staying low and with balance sheet shrinkage tightening financial conditions, we expect the FOMC to raise the federal funds rate only once in 2018, rather than three times as indicated by the FOMC’s median projection.”

“US rates strategy: Lower-for-longer theme intact. We see the 10-year US Treasury yield at 2.3% by the end of 2018, even as the Fed begins to shrink its balance sheet.”

“FX strategy: Appointment of Mr. Powell would likely have a limited impact on USD given the expected predictability of Fed policy. FX markets more focused on markets such as AUD, NZD, NOK, and SEK, where the policy pivot has yet to happen.”

“Equity strategy: Continuity would support above-average equity valuations. The slow speed and moderate scale of this monetary tightening cycle has been important for US equities.”

“US credit strategy: Policy continuity is likely to further support the rally we have seen in USD credit. Mr. Powell has made clear that he believes there may be aspects of post-financial crisis regulation that have imposed an “unnecessary burden” on US banks and could be eased, and developments there are important for credit markets.”

“Emerging markets: An appointment of Mr. Powell should be seen as benign for emerging markets as it suggests policy continuity in the US.”