Original title: After Powell, there are still three supervisory positions to be determined. Biden still has the opportunity to “reshape” the Fed
Biden has made a decision, and the current Fed Chairman Powell is re-elected, and the market responded. Powell stood behind Biden and took over his hopes for the US economy.
Even if the appointment of Republican Powell is seen as a move by Biden to “beyond the bipartisan dispute”, there are still three positions within the Fed to be appointed, including important positions responsible for bank supervision. As a result, Biden still has the opportunity to reshape the Fed. Put a personal mark.
The appointment statement on November 22, local time showed Biden’s bright prospects for the US economy. “As I said before, we can’t just return to the state before the new crown epidemic. We need to build the economy better.” Biden firmly believes in the experience, judgment, and integrity of Chairman Powell and Vice Chairman Brainard. , I believe that the two can continue to pay attention to maintaining low inflation, price stability and achieving full employment, and help promote a stronger economy.
As the Fed’s Taper process started in November, Powell’s main core work is to close the measures during the COVID-19 pandemic in the next four years. At the same time, after Biden expressed his willingness to participate in the next presidential election, he has high economic hopes. , Powell also needs to weigh repeatedly between controlling inflation and accelerating the economy.
Biden’s economic hopes for re-election
From an economic perspective, Powell is the best candidate to help Biden realize his plan, and Biden’s heavy proposal cannot be lost, and its success or failure will also depend on Biden’s mid-term elections next year. On November 22, local time, White House Spokesperson Psaki confirmed in an interview with reporters that Biden intends to run for president of the United States again in 2024 and seek re-election.
According to the results of a joint poll published by USA Today and Suffolk University on the 7th of this month, the approval rate for Democratic President Biden has fallen to 38%, and nearly two-thirds of the respondents do not want to see Biden is competing for the 2024 presidential election.
In this situation, Powell will inevitably become Biden’s economic bet. Biden quoted Powell’s previous statement to him in his supplementary comment. “Jay (Powell) said that when as many people as possible are able to work, the economy will be healthier and stronger. If deep-rooted inequality prevents some Americans from fully participating in our labor market, not only will they lose opportunities, but the overall The economy will also not be able to realize its potential.”
Biden said that the US economy has huge potential and huge uncertainty, and we need the stability and independence of the Fed.
In addition, maintaining policy continuity is another outstanding advantage of Powell. Powell, who has accumulated a lot of experience during the new crown epidemic, can bring more stability than Brainard, allowing the Fed to maintain a stable track, especially when inflation is gradually exceeding expectations and economic uncertainty.
On November 4, at the Fed’s meeting on interest rates, Powell stated that he would keep the benchmark interest rate unchanged and start this month to reduce the monthly purchases of US Treasury bonds and MBS by US$10 billion and US$5 billion, respectively. The reduction will be based on Make adjustments to the actual situation.
The subsequent U.S. October CPI data released that month’s non-seasonally adjusted CPI annual rate reached 6.2%, a 31-year record. Subsequently, Fed Vice Chairman Clarida, Fed Governor Waller and St. Louis Fed Chairman Brad hinted last week that the Federal Open Market The FOMC (FOMC) meeting on December 14-15 may discuss the topic of speeding up code reduction.
Invesco Asia Pacific (except Japan) global market strategy Zhao Yaoting expressed his view that investors are optimistic about Powell’s re-election and the continuity of monetary policy, which will push the yield of U.S. Treasury bonds upward, and the U.S. dollar has climbed to a 14-month high. The Federal Reserve introduced a new “average inflation target” policy framework to help the country’s economy weather the epidemic.
Greg Valliere, chief U.S. policy strategist at AGF Investments, said on November 22 local time that President Biden’s support rate in the polls is very bad, and the Democrats are likely to lose seats in the House of Representatives, one of the reasons is inflation. “This cross-party appointment provides Biden with a barrier to some extent. This is not Biden’s Federal Reserve, this is Powell’s Federal Reserve.”
Three supervisory positions to be determined
Even if Powell is nominated as a cross-party appointment, in any case, the Biden administration has an important opportunity to reshape the Fed’s high-level positions and put its mark on it.
Biden still needs to nominate three members of the Federal Reserve Board of Governors, including supervisory positions that have significant influence on the banking system. It will determine the extent to which the Federal Reserve will tighten regulatory policies and be responsible for dealing with financial risks, including responses to climate change. , The level of supervision required for cryptocurrency, etc.
Powell has previously stated that if he is re-elected successfully, he will obey the candidates in formulating the Fed’s regulatory approach. “I respect the person who will set the regulatory agenda,” Powell told reporters in September. “It is entirely appropriate to find a new person to observe the current state of regulation and supervision and make appropriate changes.”
“We expect that regulators will continue to require large banks to comply with current high-standard regulatory standards to support an important part of the U.S. financial system that is resilient.” Kevin Fromer, Chief Executive Officer, Financial Services Forum, representing large U.S. banks Said in a written statement.
“It is surprising that Brainard is not in charge of bank supervision arrangements.” UBS Research reported that she had opposed some of the Fed’s measures to relax supervision of the banking industry in recent years, and believed that the central bank should adopt stricter measures.
The regulatory attitude towards banks is the most obvious difference between Powell and Brainard, and Warren has criticized Powell many times for this, saying that it has relaxed the Fed’s supervision of banks and other institutions.
“During his tenure at the Federal Reserve, Brainard has also been firmly calling for strict rules to protect the pensions and savings of the American people.” Biden said that she led the Federal Reserve’s efforts to ensure that our banking system serves the communities they serve. Serving everyone, so that no matter where you live or your background, every American can get the credit they need to start a business, buy a house, and have a fair chance in life.
In addition, compared with Powell, Brainard is more dovish. Compared with inflation, she is considered to be more determined to focus on expanding employment as widely as possible. Therefore, at a time when other Fed presidents are more worried about inflation, She is expected to become an important defender of the Fed’s largest employment commitment to various population groups.
However, as Brainard, who once pointed out that the Fed has gone too far in the deregulation of banks, the appointment of its vice chairman also means that she will not participate in setting the regulatory agenda.
The market has repriced
As soon as the news of Powell’s re-election came out, the market has re-priced the price. As a result, it is expected that two interest rate hikes will be converted to three interest rate hikes by the end of 2022.
“Many media are discussing this pair of policy signals.” UBS chief economist Paul Donovan believes that it is difficult to put Fed Chairman Powell in the same position as previous Fed leaders. In any case, the leadership of economic policy is more influenced by Brainard and San Francisco Fed President Williams.
“The decision is unlikely to have a substantial impact on the broad policy trajectory.” Deutsche Bank previously reported that the inflation rate in 2022 may remain at a level that makes most Federal Reserve officials uncomfortable. Because of the rotation of the more hawkish regional Fed chairmanship, even if the new chairman wants to do so, how the policy can be changed to a dovish direction will be restricted.
“This move comes at a time when some senior Fed officials are calling for an accelerated pace of tightening.” UBS said that the current vice chairman of the Fed, Clarida, said on Friday that the market is also waiting for the October personal consumption expenditure index (PCE) to be released this week. ), this is the Fed’s favorite measure of inflation, and it may increase the pressure to tighten policy. The minutes of the Fed’s November meeting released this week may also indicate that the calls for a stronger stance are on the rise.
But UBS believes that Powell’s re-election further proves that his patience with austerity policies will continue. Investors now believe that the Fed will raise interest rates by 25 basis points before its June meeting next year, which is also reflected in an 8 basis point increase in the two-year Treasury yield.
In UBS’s view, the market’s pricing of inflation has also declined moderately, and the four-year breakeven (that is, roughly within Powell’s next chairmanship) has fallen by about 4 basis points. The 10-year U.S. Treasury yield rose by 8 basis points, indicating that the market still has confidence in economic growth, because the market is worried that continued inflation will force a substantial tightening of monetary policy, which may depress the 10-year U.S. Treasury yield.
Overnight index swaps (OIS) and Eurodollar futures increased slightly due to the inclusion of the Fed’s interest rate hike premium. The market expects the Fed to raise interest rates for the first time at the Federal Open Market Committee meeting in June. “The market believes that Brainard is more dovish than Powell, which means that if Brainard is nominated as the chairman of the Federal Reserve, interest rate hike expectations may be postponed to the second half of 2022 instead of mid-year-despite the two people’s monetary policy and The current view of’transitional’ inflation factors is similar.” Zhao Yaoting explained.
He said that plans to accelerate the scale reduction may be announced in December at the earliest. Employment and consumer inflation data in the next few months will become the focus of attention.
“However, the Federal Reserve has made it clear in its recent statement that it is willing to speed up or slow down the pace of reduction. As the European epidemic builds up momentum in countries with relatively low vaccination rates, any spread to the United States may prompt it to avoid acceleration. UBS said that as labor market data is still distorted by the epidemic, it is expected that the Fed will avoid overreacting to signs of austerity. The annual inflation rate in the United States will drop from 6.5% at the end of 2021 to 1.8% at the end of 2022. If this is the case, it would be more reasonable for the Fed to stand still before 2023.
Mark Cabana, director of U.S. interest rate strategy at Bank of America, also pointed out that he thinks Powell may take a tougher stance. “The appointment of Powell should allow the Fed to make adjustments to recognize the upside risks brought by inflation, and they can begin to discuss how to deal with it. Previously, due to the uncertainty of the nomination decision, the Fed’s leadership was affected to some extent in making this shift. limits.
“It is worth noting that all appointments must be confirmed by the Senate. In the current political environment, nothing is absolutely certain.” UBS said that although a few reformists have indicated that they will not support Powell, he has received bipartisanship. With extensive support, I believe it is not difficult to continue as the helm.
However, UBS believes that “Brainard’s appointment may not be so smooth. We estimate that most Republicans in the Senate will vote against it, but they should be collectively approved by Democrats. For other appointments, we expect Biden to choose a strong background. , Monetary policy views tend to be mainstream and candidates who are widely supported by the Senate.”
“There are many problems before the Fed that need to be resolved, including the possibility of raising interest rates before the midterm elections in November next year. This is likely to cause unnecessary attention from politicians and voters, but we believe that the Fed will continue to move ahead based on economic rather than political considerations.” UBS say.
(Author: Hu Tianjiao Editor: Xin Jizhao)