If Lael Brainard is named Federal Reserve chair, the first move by financial markets may be to price in an even more dovish central bank.
That means the Fed would be expected to take longer to raise interest rates or tighten policy than under Fed Chair Jerome Powell. Currently, traders are expecting the central bank to begin raising rates in the second half of next year, once it winds down its bond-buying program.
Until just recently, Powell was expected to be renominated to the chairmanship, but President Joe Biden has now interviewed both Powell and Brainard and is expected to make an announcement by the weekend.
“I think the market views Brainard as slightly more dovish. I think the honest answer is there probably is not a significant difference between either candidate. The biggest asset that Powell has is the trust and the confidence of the market, and a kind of a track record of doing exactly what he thinks is right despite the considerable amount of political pressure,” said Ed Mills, Washington policy strategist at Raymond James.
Economists and investors perceive Brainard as more political, whether she proves to be or not. Mills said she is seen as political because of her donation to the presidential campaign of Hilary Clinton in 2016.
The choice of either candidate is not expected to be tumultuous for stocks, but financial markets could react.
Market impact from Brainard nomination
Boockvar and others do not expect much market reaction at all to Powell, if he is nominated for four more years, but it could be different in the case of Brainard.
“I think you’ll get a 10-minute bounce in the [stock] market if Brainard gets the appointment, and you’ll see more than just a 10-minute response in the Treasury market, where you’ll see a steepening yield curve,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors.
Bond strategists say if Brainard is nominated, market inflation expectations could rise, with inflation-related instruments moving higher, like Treasury inflation-protected securities. The spread between the yields of shorter-duration Treasury notes like the 2-year and longer-duration notes like the 10-year could widen, with the 10-year yield rising due to inflation concerns.
Powell’s performance
Sam Stovall, chief investment strategist at CFRA, said the Dow Jones Industrial Average has had an annual compounded growth rate of 11% under Powell.
“If Powell is renominated, we probably end up seeing both stocks and bonds move higher,” said Stovall. Brainard would bring an element of uncertainty, and that could initially be negative but her perceived dovishness may be a plus for stocks. Stovall notes the Dow has posted a near 4% median gain in the first six months of a new Fed chair and has risen two-thirds of the time.
“Bonds yields could move a little higher. We already know what the trajectory of tapering is likely to be and when the first rate increase is likely,” said Stovall. “If Brainard is nominated, the equity market either goes up a little more than they would with a Powell renomination or they tread water.”
Morgan Stanley Investment Management’s Jim Caron said the two would be very similar when it comes to policy and the market may only move marginally if Brainard is nominated. “It’s not like either one would be dramatically different from the other,” Caron said. “It’s not like you’re going from a hawk to a dove. You’re changing leadership, not changing philosophy.”
Reference: CNBC
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