Fed under Powell more hawkish, while easier on regulation

A Jerome Powell Federal Reserve is expected to balance tighter monetary policy with easier regulation, according to Peter Chatwell, head of rates strategy at Mizuho International.

Jerome Powell will be sworn in as chairman of the US Federal Reserve (Fed) on 5 February 2018. He is seen as the continuity candidate. But what is he inheriting from outgoing Fed chair Janet Yellen, and how will he manage market expectations?

Find out more on why the Federal Reserve is important to traders.

Powell's inheritance

Three, possibly four, quarter point US interest rate increases are expected in 2018, according to Peter Chatwell, head of rates strategy at Mizuhi International. The stronger oil price and weaker US dollar could be a 'perfect storm' to trigger higher inflation in three to six months.  

Hawkish Powell and a tighter monetary policy

Powell will not be the only new face at the Fed. The US central bank will soon have a new vice chair and New York Fed president. The change in the top three Fed roles will lead to an easing up on the regulatory side, allowing banks to be more aggressive in lending to the real economy, Chatwell thinks. This will allow monetary policy to be tighter.

Given Powell's background in banking, rather than economics, his likely bias towards deregulation comes as no surprise to many analysts. The past decade in the aftermath of the global financial crisis has been characterised by a major ramp up in financial sector regulation to avoid a repeat of the mistakes in the run-up to 2007.

Who is Jerome Powell?

Unwind of the great rotation?

Once the Fed's balance sheet reduction reaches full tilt in October, an unwinding of the so-called ‘great rotation’ is likely, Chatwell says, with investors selling out of riskier assets and coming back into lower risk assets.

The great rotation is the idea that money will flow out of stocks and into bonds, as bond yields increase enough to lure money away from equities.

Chatwell points out that the Fed Funds rate will at some point be above the S&P 500 dividend yield of 2%, which he says is a trade opportunity, but he says it does not herald a bear market for bonds. He expects a flatter bond yield curve, with the riskier end of the curve coming down in price.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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