New Fed Chair Powell Winning Over Wall Street

By Brian O'Connell

He’s only been on the job for a month, but new Fed Chairman Jerome Powell is already making waves.

Powell buzzed the trading markets this week with a call for multiple potential interest rate increases in 2018.

“At the December meeting, the median [FOMC] participant called for three rate increases in 2018,” Powell said during an appearance on Capitol Hill. “Now since then, what we’ve seen is incoming data that suggests a strengthening in the economy.”

The labor market is showing continued strength, he added, which adds to speculation that inflation is “moving up to target.”

“We’ve also seen continued (economic) strength around the globe, and we’ve seen fiscal policy become more stimulative,” Powell said.

Sworn in Feb. 5 to replace controversial Fed chair Janet Yellen, Powell went out of his way to reassure the country and the nation’s business and financial industries that his intent is to keep a steady hand on the wheel.

“While the challenges we face are always evolving, the Fed's approach will remain the same,” Powell said. “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.

“We will also preserve the essential gains in financial regulation while seeking to ensure that our policies are as efficient as possible.”

Wall Street insiders say that Powell, who comes from a private-sector background, is already thinking more like a chief executive officer than a government bureaucrat.

He has already indicated he’ll lean closely on the Fed’s robust roster of economists, in an effort to deformalize what some see as a rigid infrastructure model that kept economists and rank-and-file staffers at arm’s length.

Couple that set of optics with early returns on economic policy and Wall Street likes what it sees from Powell.

“The street was greatly relieved when the Trump administration nominated Jerome Powell,” said Chad Leat, former vice chair of Global Banking of Citibank. “Powell is closely associated with the dovish policies of the last number of years and he has publicly been quite supportive of those policies which have been an elixir for the financial markets.”

'A Great Deal of Volatility'

Challenges abound, however, not the least of which is burgeoning inflation.

“We have recently seen a great deal of volatility driven in large part by economic data that could be a precursor to rising inflation (a tightening of the job market specifically),” Leat said. “The markets don’t yet know how this new regime will digest this data and the result has been this see-saw in the equity markets.”

But if the Powell regime gets “trigger happy” on interest rates, we could see a real correction, he added.

The quality that market players value in a Fed chair, above all, is predictability, and Powell passes mustard on that front, too.

“The old adage that the markets dislike uncertainty applies to the actions of the Federal Reserve and the Federal Reserve Board chair,” said Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pa.

An unconventional President Trump made the conventional choice in Powell, Johnson said.

“The only choice Trump could have made that would have involved less risk would have been to re-appoint Janet Yellen, and that was not going to happen,” he said. “Comments Yellen made at a conference in Jackson Hole were not received well by the incoming administration, when she delivered a defense of the regulations enacted by the Obama administration following the financial crisis.”

Contrary to the rhetoric of the Trump administration, Yellen argued that enactment of the much-derided Dodd-Frank Act of 2010 made the global financial system safer and facilitated the recovery of the global economy, Johnson noted.

At one point, Trump even suggested a conspiracy between Yellen and Obama “to keep interest rates low and prop up Obama’s presidency,” he said.

Plugged-In Chair

Even though Powell doesn’t have the usual government or academic pedigree of recent Fed chairs, he is plugged into the Federal Reserve culture.

“Powell served as a Fed governor since 2012, and voted alongside the regulatory and policy decisions of both Yellen and her predecessor, Ben Bernanke,” said Johnson. “His confirmation calmed the markets as the Fed is expected to continue its strategy of making data-driven decisions.”

Others agree with that sentiment, suggesting that Powell is more pragmatic and team oriented than one might think.

“A key indicator of where he might go in the future is the fact that he never cast a vote in dissent of a central bank decision during Yellen’s time at the helm,” said Steve Rick, chief economist at CUNA Mutual Group. “So there should be a great deal of continuity here in terms of policy.”

The biggest fear of the markets would be a Federal Reserve that was quick to raise rates, Johnson said.

“It’s believed the Fed will slowly rise rates as economic growth continues, although Powell has already indicated that may not be the case in 2018,” he said. “But in the end, Powell was a safe, non-controversial and status-quo choice to assume the most important position with respect to the world economy.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].