US President Donald Trump’s pick for the next Federal Reserve chair, due to be announced today, is likely to have an impact on fixed income markets and US monetary policy, according to Investec.
Though markets have been stable following the US Federal Reserve’s decision not to hike the interest rate, President Trump’s pending announcement about the leadership of the Federal Reserve could have an effect on markets and policy.
That’s the view of Investec Global Multi-Asset Income Fund head of multi-asset income John Stopford.
“The outlook for Fed policy is currently more uncertain than normal, given that not only is Janet Yellen likely to be replaced as Federal Open Market Committee chair, but also because there are currently three vacant seats on the committee,” Mr Stopford said.
This would have the potential to “temporarily increase the importance of regional Fed presidents”, he added.
“The new chair will also influence the direction of policy, although due to the committee-based structure, they will need to gain the confidence of their colleagues to swing votes their way,” Mr Stopford said.
“Taking into consideration that the front runners for the chair are Jerome Powell, an existing committee member perceived as a continuity candidate, and John Taylor, who favours a more rule-based approach to policymaking and is perceived as more hawkish, the choice of chair is likely to have some impact on markets.”
Mr Stopford indicated that emerging markets and currency markets were particularly sensitive to changes in US monetary policy, but also sought to underscore that “the current sensitivity of most emerging markets” in recent years “is likely to be lower”.
“First, the majority of emerging markets now run current account surpluses, making them less reliant on foreign capital,” Mr Stopford said.
“Secondly, real yields are fairly high; finally, currencies appear somewhat cheap relative to their terms of trade.”
Fidelity International’s global economist Anna Stupnytska shared similar sentiments regarding the market’s reaction to the Fed’s unchanged rates.
“Markets barely moved on the FOMC statement, which made few changes other than noting that growth remains ‘solid’ and striking a more explicitly subdued tone on inflation,” Ms Stupnytska said.
“Markets will be watching December more closely, and are now 90 per cent priced for a December hike.”
However, she warned that the December rate hike was “not entirely a foregone conclusion”.
“More likely, it means that rate rises will be very slow for the foreseeable future, and could very likely go on if economic data softens,” Ms Stupnytska said.
She also warned that, after the start of 2018, she expected “weakening in the US economy to prevent the Fed from raising rates in line with their current projections”, with “another unknown” being balance sheet unwinding.
“If the cumulative effect of this process does amount to implicit tightening – which is likely – then the rate path should be shallower relative to the Fed’s current trajectory,” Ms Stupnytska said.