by Tim Carkin, CAIA, CMT
Senior Vice President
This week, President Joe Biden is expected to announce his choice of Federal Reserve chair. The two favorites are the incumbent Jerome Powell and current Fed governor Lael Brainard. Within the last several weeks, odds showed that Chair Powell was a shoe-in. But more recent indications show Brainard’s favorability increasing. Below are the odds from the online betting site PredictIt. As of the writing of this blog, Powell has a 67% chance of remaining chair. Yet, the longer we wait, the more bettors believe Brainard has a chance at the nomination.
Source: PredictIt
Both Powell and Brainard are reasonable choices: they have impressive resumes, and both have existing seats on the Fed board. Frankly, there isn’t much daylight between Brainard and Powell’s policy choices when it comes to the pace of tapering or the rate lift off. Why, then, is Powell favored over Brainard? Powell’s experience as the incumbent Board Chair has lent him credibility. For investors and lawmakers, he brings a comforting level of predictability. He has cultivated relationships in Congress on both sides of the aisle. He was the clear and understandable voice of the Fed during times of pandemic and rising inflation, bringing comfort to investors and pundits alike.
If nominated, Lael Brainard must prove herself to be above the inevitable "partisan fray” during Senate approval hearings. As a new, dovish Fed chair, her appointment might cause volatility as the market calibrates to new leadership style. This is not a new phenomenon and can be overcome with clear, nuanced and frequent updates. In the recent past, Fed chairs have stumbled early in their tenure, setting the tone for the remainder of their term. In 2013, Ben Bernanke announced the Fed would reduce its bond purchases ... without specifying the size and timing. Bond traders, misrepresenting the announcement, sold bonds resulting in the “Taper Tantrum.” Similarly, during her tenure, Janet Yellen announced she “expected a rate hike,” and investors spooked when there wasn’t one at the very next meeting.
In our opinion, the key to a "good" Fed chair, has more to do with communication than what party nominated them. The Fed has a tight rope to walk in the next six-to-twelve months as their dual mandate of full employment and controlled inflation is tested. Biden’s choice will need to soothe the markets while balancing all the above.
Thanksgiving Dinner will Cost More This Year
Every year the American Farm Bureau Federation calculates the cost of dinner for a family of 10. This year, according to their calculations, it will cost $53.31, up 14% from last year. This analysis is a useful representation of the tight rope the Fed has to walk determining what is transitory and non-structural, and what is more permanent inflation. For example, the biggest ticket item for the meal, the turkey, is up 24%. Commodity and feed prices are up and global demand for meat is high. Supply chain issues have grocery stores discounting turkeys to get shoppers in earlier to reduce outages. Pie crusts and dinner rolls are also up 15–20% and are expected to be sold out in many stores due to high transportation and fuel costs. Adding to dinner costs, a gallon of gas will be $3.35 according to GasBuddy, up from $2.11 last year. How much of the rise is inflationary pressure and how much is temporary due to supply or the supply chain? That is a question the next Fed chair will address. The more clarity they provide in their thinking and projecting, the less turbulent the markets will be.
Our Takeaways for the Week:
The identity of the next Fed chair matters less than how they will communicate
Stocks are near all-time highs as we head into a holiday-shortened week