The announcement of Jerome Powell as the next US Federal Reserve (FED) Governor has the potential to increase the risk of a FED policy error in 2018 and beyond.
The FED has indicated in its economic projections that it expects to raise interest rates by 75 basis points in 2018, so potentially three 25bps rate rises. This is in stark contrast to the futures market pricing, which is expecting only 35 basis points rise in 2018. Recent analysis by Prattle, who ran some algorithms on public statements from potential FED governors, have revealed that he could be significantly more dovish that Janet Yellen. We are cautious on this analysis because the last public statement he made mid-year was a carbon copy of what Janet Yellen was saying at the time, revealing at least that he tends to toe the party line and according to Pantheon Macroeconomics he has never dissented.
“Jerome Powell has never dissented”
Jerome Powell’s formal background and education have not been in economics, rather legal and finance. He expressed his reluctance over implementing a third round of quantitative easing, but he adopts the mainstream view of the FED that gradual rate rises are appropriate. Given his career history and having so far not publicly stated his dissent in meetings suggests he is likely to be more reliant on his team of economists in the Federal Reserve to form opinion, who are known to be generally hawkish. Conversely, there are potentially four vacant regional governorships in 2018, it is likely that these positions will be filled dovish individuals as its very much in the interests of the current political administration to have accommodative monetary policy to help fund tax cutting initiatives against the backdrop of substantial government debt.
Our worry is that this tussle between newly installed doves and a governor more reliant on hawkish economists makes the policy path for 2018 quite uncertain. It also comes at a time when inflationary pressures are likely to build. The labour market suggests the wage pressures are likely to rise significantly in 2018, another element that may require a more hawkish policy path.
Transitory factors such as mobile phone tariffs, medical care costs and air fare costs, all of which have been falling until recently, will begin rolling out of the inflation data in 2018, implying there are far more upside risks to prices.
It is likely that Jerome Powell will pursue a similar path to Janet Yellen in the first half of 2018, but as inflation begins to pick up, a more polarised FED increases the probability of a policy error later in 2018.
James Butterfill, Head of Research & Investment Strategy at ETF Securities
James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.
James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.
