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MARK-TO-MARKET: Breaking tradition, Trump replaces Fed Chair

MARK-TO-MARKET: Breaking tradition, Trump replaces Fed Chair


Time to settle up the office betting pools and collect on your wagers — the nominee for the next chairman of the U.S. Federal Reserve has finally been announced!

Understandably, most Americans probably haven’t been following this story with the same level of zest as the financial markets; or perhaps even realized a new Fed chairman was being considered. However, the chairman of the U.S. Federal Reserve is often considered the second most powerful person in the world, behind only the U.S. president. Pending a Nov. 28 confirmation hearing by the U.S. Senate, President Trump’s nominee, Jerome “Jay” Powell, will assume the post that oversees America’s economic and financial system. Powell will replace current Chair Janet Yellen once her four-year term expires in February 2018. Yellen will become the first Fed chair in almost 70 years to serve a full term without being re-nominated. So, what is the potential impact from President Trump’s selection?

As America’s central bank, the Fed serves as the decision-making body for U.S. monetary policy. Its mandate is to promote the health and stability of our financial system. Through management of short-term interest rates and the availability and cost of credit, it seeks to manipulate spending, investment, employment and inflation to foster economic growth. It is the world’s most powerful and influential central bank.

Yes, the chairman is just one of 12 voting members of the Fed’s policy making committee. But the chairman holds a significant amount of sway over other members and often serves as the Fed’s conduit for communications with the financial markets.

A Republican, Powell is considered a middle-ground choice for President Trump. In 2012, he was nominated to the Fed Board of Governors and voting member of the policy committee by President Obama. Consensus among market experts is that Powell will maintain the Fed’s current strategy of gradual hikes to the benchmark fed funds rate, upon which short-term debt is often based. He openly supported the Fed’s prior two rate hikes this year and should continue his advocacy for a third, presumably in December, and three each in 2018 and 2019. Powell was an ally on the Yellen-led decision to reduce the Fed’s massive $4.5 trillion in government debt and securities bought in response to the 2007-2009 recession. The reduction will be gradual and in scheduled increments, allowing the effects to be absorbed with minimal impact. However, the reduction of these Fed assets will inevitably increase the cost of long-term debt, impacting consumers and businesses on mortgages, bank loans and long-term financing of equipment.

Though generally supportive of banking reform Congress passed as a result of the financial crises, Powell has expressed support for certain revisions. He may be more open to easing some banking regulations, a political and economic agenda item of President Trump. He also favors modifying the Volcker Rule, which restricts banks from engaging in speculative trading with their own money.

If confirmed as the next Fed Chairman, Powell’s greatest dilemma is the continuance of a moderately growing, yet still fragile American economy. Recent economic growth has improved and the national unemployment rate is at 4.1 percent, a 17-year low. But inflation, a key signal of robust consumer demand for goods and services, continues a downward spiral and stands at just 1.3 percent, well below the Fed’s 2 percent target rate. Annual wage growth, the fuel behind consumer spending, remains lackluster.

While implementing its rate hike agenda, a Powell-led Federal Reserve must walk a tightrope of balancing economic growth and inflation. The ideal pace allows for a steadily growing economy that keeps excessive inflation in check through targeted and measured rate hikes. If the Fed raises rates too fast, it risks prematurely stunting economic growth. Too slow, the Fed risks the economy overheating with runaway inflation. Each scenario would force the Fed to take more sudden and drastic measures to correct, greatly impacting the economic welfare of consumers and business.

Yes, the Fed is driven by economic data. But how that data is interpreted to implement monetary policy is what ultimately determines the success of any central bank. Powell will soon get his shot at the helm, and Americans, along with the rest of the world, will be watching.

Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.


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