How Could Jerome Powell Impact the Market as Fed Chair?

By:

December 12, 2017

Updated

This week markets were heavily focused on the coming announcement of President Trump’s new chairman of the Federal Reserve. Rumors were circulating in the market all week about Jerome Powell having moved to frontrunner and were buoyed by leaks from close advisors. The president himself fanned the flames of speculation by teasing his decision in an Instagram video published on Friday. ¹ How would the gold market be impacted if he becomes the next Fed chair?

Who is Jerome Powell?

Mr. Powell earned his law degree from Georgetown University in 1979 and worked in investment banking at Dillon, Read & Co. before spending time at both The Carlyle Group and the Bipartisan Policy Center in Washington D.C. He served as Assistant Secretary and Undersecretary of the Treasury in the President George H.W. Bush administration, and was appointed to the Federal Reserve Board of Governors in 2012. ² While appointed by President Obama, Powell is a Republican and markets have generally taken the news of his appointment as a sign of continuity with existing Fed policies, given that the content of his public speeches since joining the Fed have been generally in line with the policies of Janet Yellen. ³

Other Contenders for Fed Chair

Yet Powell is not the only candidate under consideration. Janet Yellen, the current Fe d chair, has been discussed at length as a strong candidate and Former Fed governor Kevin Warsh has also been mentioned. However, Friday’s reports quoting anonymous sources close to the process describe the evolution of two opposing camps within the administration. According to these sources, Vice President Pence leads a faction supporting Stanford University economist John Taylor, while Treasury Secretary Steve Mnuchin apparently favors Powell. The effect each would have on markets may be summed up as follows:

As mentioned, Powell is seen as keeping continuity with Yellen’s policies.
Taylor is a famous economist whose work is extremely influential, in particular his “Taylor rule” for interest rates, which stipulates rates should be adjusted as a result of inflation and economic growth. If this rule were implemented, rates would move immediately higher to an estimated 3.75 percent, likely causing an immediate crash in equity markets and to the dollar, and could send precious metals into the stratosphere. ⁴ ⁵
Warsh is an outspoken Fed critic who would also likely raise interest rates ⁶ quite dramatically.

It now appears as though the president’s closest advisers are pushing for either Powell or Taylor, with Powell supposedly the frontrunner. The president will apparently make his final decision this Friday.

How Could the Next Fed Chair Impact the Market?

Continuity in monetary policy drove equity markets higher, the dollar to rise against all currencies, and the precious metals complex to have another week under pressure. While a Taylor- or Warsh-led Fed could be instantly bullish for precious metals, the policy of Yellen or Powell will be to slowly raise interest rates over time, keeping an eye on inflation but encouraging growth.

Widespread belief in this approach is what has been driving equity markets but some analysts, including legendary investor David Einhorn, have begun calling the rise in equity markets a bubble and have called for caution in the face of surging equity prices. ⁷ It’s worth keeping in mind that the last time Einhorn called a bubble, it was July 2007 and he was shorting Lehman Brothers stock. Remember Lehman Brothers? It certainly seems as though bullish conditions for the precious metals complex is just a matter of time.