Kim Hyun-seok’s re-appointment of Wall Street Now Powell tech stocks crash

On Monday, the 22nd (local time), just before the New York Stock Exchange opens at 9 o’clock, it was announced that the Chairman of the Federal Reserve (Fed) Jerome Powell would be re-elected. The White House announced that President Joe Biden would re-elect Powell, and that his rival, Rayle Brainerd, would be appointed vice-chairman.

As soon as the news spread, interest rates and the dollar soared. Uncertainties over who will be the next chairperson have been dispelled, and some bets that accommodative monetary policy will continue if Fed Director Brainerd becomes chair have been reversed. And 30 minutes later, on the New York Stock Exchange, the S&P 500 and Nasdaq soared to all-time highs. All three major indices started with gains of around 0.5%.

Why did President Biden give Powell another four-year term to Republican and former President Donald Trump-appointed Chairman?

① The risk of inflation threatening the regime

There is an interesting passage in a statement from the White House announcing the re-election of Chairman Powell. “I am convinced that Chairman Powell and Director Brainerd are focused on lowering inflation and keeping prices stable,” Biden said in a statement. “By providing full employment, our economy will be stronger than ever.” . In other words, of the Fed’s two responsibilities, inflation was mentioned first before maximum employment.

At 1:20 p.m. that day, President Biden summoned Chairman Powell and Director Brainerd for a press conference. At this event, Powell and Brainard each had a presentation time of about one minute. “As always, challenges and opportunities remain,” Powell said. “The unprecedented reopening of the economy has led to supply-demand imbalances, bottlenecks and inflationary explosions with the lasting impact of the pandemic. We know that high inflation is taking a toll on American families,” Powell said. “We will use our tools to support the economy and strong labor market and prevent higher inflation from settling.” Brainard also said, “President, I am truly honored to have you entrusted me with this responsibility at this critical time. I promise to put working Americans at the center of my efforts while I’m at the Fed. It means lowering the .” The key to both of them in their short messages was to “catch inflation”.

President Biden is facing his worst political crisis due to inflation. A CBS-YouGov survey released on the 21st found that only 33% of respondents were in favor of Biden’s inflation management, with the remaining 67% against it. Another 56% opposed Biden’s re-election, with only 44% in favor. 64% of survey participants rated the US economy as “very bad” or “very bad”. And 84% of them cited inflation as the reason. Of the various policies surveyed, more than 60% said that President Biden was doing well, only distributing the coronavirus vaccine.

A Wall Street official said, “It is significant that Biden brought inflation to the fore in his appointment as Chairman Powell. Powell was chosen because he is believed to handle inflation better than Brainard. This means that if maximum employment was a priority, you would have chosen Brainerd.

Rick Ryder, BlackRock’s chief investment officer for global bonds, tweeted: “The Fed has been waiting surprisingly long for the tapering to begin. In fact, liquidity is still being injected into the system now that overheating and inflation are pointed out as major risks to the economy. Core Personal Consumption Expenditure (PCE) prices are expected to rise through the spring of 2022. They will rise more than current Wall Street estimates, peak in the first quarter, and then fall in the second half of next year. “Based on the labor market and the like, we believe the Fed is likely to turn hawk in the next few months. This could be seen as a way to increase the pace of tapering ahead of an early rate hike.”

Diane Swank, an economist at Grand Thornton, told Bloomberg TV on the same day that “Powell has radically shifted monetary policy in the past, and it will be possible in the future.” In fact, Chairman Powell was not originally a dove. After taking office, Chairman Powell accelerated the rate of interest rate hikes that began under Yellen Chairman (3 times in 2017 and 4 times in 2018), and is a person who has implemented quantitative austerity (QT) in earnest, reducing assets that have been increased by quantitative easing (QE). is. Former President Trump threatened Powell’s continued austerity measures, saying he had the power to fire him, and criticized him, saying, “Which is the greater enemy, Chairman Powell or Chinese President Xi Jinping?” He spoke of QT as ‘autopilot’ (which continues automatically), which triggered the stock market crash in December 2018. Then, a sharp change in policy took place, lowering interest rates again from June 2019.

On Wall Street Now, on September 3rd, ‘If Powell is re-elected, will he turn to ‘hawk’? Bond King I once published an article titled “Interest rate 2% within 1 year” ( www.hankyung.com/international/article/202109039218i). It’s becoming visible.

In the United States, President Biden is expected to hold a press conference tomorrow and announce plans to release strategic oil stockpiles with China, India, Japan and South Korea. This is also a price response dimension. But I don’t know if it will work. Bloomberg reported on the same day that “OPEC+ could (downward) the planned increase of 400,000 barrels per day in December if countries release their strategic oil reserves.” On the same day, the price of West Texas Intermediate (WTI) rose 0.81 US Dollars (1.07%) to close at 76.75 US Dollars per barrel.

However, JP Morgan reported in the report, “In December 2018, the New York Stock Exchange experienced a strong sell-off due to continued Fed tightening. expected that.

② Market stability and possibility of Senate approval

It would be even more fatal for President Biden if even the stock market crashed in the face of poor public opinion on how the economy works. Jim Paulson, chief investment strategist at Ruthhold Group, told the Wall Street Journal: “President Biden’s choice calmed the market. He wouldn’t have named Brainard Director. There were concerns,” he said. “Like you or not, you know what Powell is doing. The devil you know is better than the devil you don’t know,” he said. Was there any need to worry?”

Moreover, Powell is almost guaranteed to pass a Senate hearing. The WSJ reported that 68 of the 84 people who voted in favor of his appointment four years ago are still in the Senate. Brainerd, a Democrat, also donated to Hillary Clinton, so he’s likely to oppose it in the 50-seat Republican Party, which is half the Senate. There are also concerns about further inflation. Senate Banking Committee Chairman Sherrod Brown (Democrat) and member Pat Tumi (Republican) immediately welcomed the news of Powell’s appointment.

③ Appointment of 3 other directors is enough + Brainerd

Democrats, including Senator Elizabeth Warren, have been opposed to Powell’s reappointment. It was inconsistent with the main policies of the Democratic Party, such as responding to climate change. Still, President Biden pushed Powell for re-election because there are still ways to expand Democrats’ influence within the Fed.

“There are still three seats left on the Fed’s board, including the important role of vice-chairman of banking supervision,” the White House said in a statement. Randall Quals, former vice chairman of banking supervision, announced earlier this month that he would step down from the Fed at the end of the year. The reason was high pressure from Democrats to resign after he was appointed as a Republican nominee and has led the deregulation of banks. Another vice-chairman, Richard Clarida, will end his term in January next year. It is a common practice to serve as chairman or vice-chairman, and then resign if not reappointed. One seat here remains originally vacant.

Bank stocks soared on the day, with the sector index rising 1.43%. At one point, it was up more than 2%. It’s thanks to Brainard being appointed vice-chairman, not vice-chairman of banking. However, a more progressive person may be appointed as vice-chairman of banking. Senator Warren said he would vote against Powell, noting that “President Biden’s upcoming choice to fill the vacant position as vice-chairman is very important.” Mike Mayo, Banking Analyst at Wells Fargo, said: “This announcement raises expectations that interest rates will rise next year, and higher short-term rates will help the bank’s stock price.”

Interest rates rose sharply around 9 a.m. on the news of the re-election of Chairman Powell (Brainard eliminated) on the same day. The 10-year U.S. Treasury yield rose from 1.54% to 1.58%. And from 11:30 a.m., it rose further and soared to 1.637%. In the end, it closed at the 1.630% level, up 8bp (1bp = 0.01% point) from the previous day. In particular, the five-year bond, which is affected by the base rate, rose by nearly 10 basis points to the 1.32% range. Betting on a base rate hike has also gained strength in the Chicago Mercantile Exchange (CME) Fed Watch market, swap rate markets such as Eurodollars, and inflation-linked bonds.

This is because the appointment of Chairman Powell has made monetary policy more likely to tighten (compared to when Brainard became chairman). Former Treasury Secretary Larry Summers said on the same day that “the tapering should end within three months and interest rates should be raised.”

In addition, a massive $117 billion Treasury bond bid, scheduled for today, was held, fueling the rise in interest rates. In the $57 billion two-year bid announced at 11:30 a.m., the winning bid rate was 0.623%, 1.1bp higher than the market rate (WI) of 0.612% at the time of issuance. This is due to a decrease in demand due to the possibility of an increase in interest rates in the future. Also, in the $58 billion five-year bid announced at 1 pm, the successful bid rate was 1.319%, 1bp higher than the market rate (WI) 1.309% at the time of issuance.

As interest rates rose in two stages, the Nasdaq, which once soared to 1.2% at the beginning of the market, turned negative around 11:40 am. It continued its downward trend and eventually closed down 1.26%. The S&P 500 fell 0.32% and the Dow managed to maintain its gains of 0.05%.

A Wall Street official said, “The Fed is ultimately in the hands of its chairman, so this decision can be seen as determining a major change that will determine the next four years.” There is no choice but to raise interest rates gradually in the future.”

As interest rates rise and liquidity evaporates, the price of gold fell by more than 2% at one time, and cryptocurrencies such as Bitcoin also plummeted.

Regarding the appointment of Chairman Powell, Bloomberg TV interviewed Goldman Sachs chief economist Jan Hatchius and Bank of America’s Mark Kaverna, head of interest rate strategy. It has a lot to say about what will happen. I convey this as it is.

“The re-election of Powell provides continuity and a very strong sense of unity, at least when it comes to monetary policy,” said Jan Hetzius, chief economist at Goldman Sachs. He said he would maintain the prospect of a key rate hike in July and November next year, as Powell has been elected for two consecutive terms. “Inflation will still be very high in the middle of next year,” Hetzius said.

However, he did not expect to speed up the tapering at the Federal Open Market Committee (FOMC) in December. “We’ll discuss it at the December meeting, but I don’t expect to see any faster tapering. For now, I expect to hold on to the pace and raise rates once that end is reached,” he predicted.

As for conditions to increase the tapering, he said, “I think we need to see a significant upward surprise in inflation. Our forecast is that by the end of the year, core personal consumption expenditure (PCE) inflation will reach 4.3-4.4% per annum.”

“I think inflation is the number one topic for the Fed,” he explained.

“I think the announcement of Chairman Powell’s re-election gives more confidence to the possibility of a rate hike,” said Mark Kavana, head of interest rate strategy at Bank of America. “The market is pricing in nearly three rate hikes next year.” . “In the meantime, the Fed leadership has been somewhat constrained in its response to inflation while awaiting a decision from the White House,” he said. explained.

“As the Fed becomes a little more hawkish, there is a risk that real interest rates will start to rise. We should consider today’s announcement of Chairman Powell’s re-election,” he said. In fact, I’m worried that sending hawkish signals to change attitudes will make me more concerned about inflation. A slight increase in real interest rates will backfire on risky assets. Higher real interest rates can actually constrain risky assets. I think there is,” he said.

However, he also said, “It seems a bit early” about the possibility of increasing the tapering speed at the FOMC in December.

New York = Correspondent Hyunseok Kim realist@hankyung.com