Fed Bets Could Move Even More If Decision Lets Powell Cut Loose

(Bloomberg) - The simple fact that the Federal Reserve chair nomination is now out of the way may allow the central bank to turn slightly more hawkish, potentially adding further fuel to front-end rate bets.

There has been a notable repricing already, related in large part to the fact that Lael Brainard -- the candidate that U.S. President Joe Biden did not tap to lead the Fed -- was perceived as potentially less inclined to tighten policy than incumbent Jerome Powell. But the removal of some concerns over renomination could also allow Powell himself to cut loose a little more and follow the kind of less-expansive policy that some many observers believe is warranted.

Mark Cabana, head of U.S. interest rates strategy at Bank of America, is one observer who sees the door open to a more hawkish stance by Powell. “The announcement today should allow the Fed to pivot, to acknowledge the upside risks from inflation and they can begin to talk about how they will respond,” he said on Bloomberg Television. In many ways, the Fed leadership had been “somewhat constrained in making this pivot” by the uncertainty over the nomination decision, he said.

He recommends being tactically short duration, and said that the belly of the Treasury curve is “what’s going to reprice the most.”

Saving Time?

The continuity that Powell provides is also potentially a factor for the path the Federal Open Market Committee takes. It would have taken some time for Brainard to get her feet officially under the desk, potentially delaying any shift as Powell would be something of a lame duck incumbent if not renominated.

“A Brainard appointment would have cost time,” said Chris Aherns, a strategist at Stifel Nicolaus & Co “The Powell appointment allows more time for the FOMC to evolve towards a more restrictive stance.”

Some policy makers are already making noises to that effect. Vice Chairman Richard Clarida, Governor Christopher Waller and St. Louis Fed President James Bullard all signaled just last week that the topic of faster asset-purchase tapering might be on the table when the FOMC meets in December.

A more hawkish shift could see an extension of the move that’s already brought pricing of the Fed’s first full quarter-point rate increase forward to June 2022, and the release of this week’s FOMC minutes could add extra impetus potentially too.

By Benjamin Purvis, Alexandra Harris and Ye Xie


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