Fed to pick up where it left off under new chair, experts say

November 08, 2017

Keywords: Investment Services

Pending something highly unusual, one of the Federal Reserve's current governors - Jay Powell - will be sworn in as the central bank's 16 chairperson in February. Although the selection of Powell was widely expected - 52 of 100 economists believe he'd be President Donald Trump's pick, in a survey done by Bloomberg - there's nevertheless some question about what to expect with the Fed under new management.

For the most part, though, industry insiders seem to believe the Fed will operate as if outgoing chair Janet Yellen had never left.

"[Powell] has been very supportive of Yellen's policies over the last few years, said the Wall Street Journal's Jon Hilsenrath in a recent web video posted by the business news publication. "For instance, he has supported the gradual shrinking of the Fed's portfolio of mortgage-backed securities and treasury bonds, more than $4 trillion worth. And he supported the Fed's gradual increase in interest rates from near zero."

95 percent believe a third rate increase is imminent
For almost a decade, the Fed left short-term interest rates untouched in a bid to stimulate the economy after the recession hit. But 2017 saw two quarter-percent rate increases, putting the current benchmark at between 1 percent and 1.25 percent, when including the previous rate bumps from previous years. Economists in a recent Wall Street Journal poll were nearly unanimous in believing a third rate hike will come in December, at this year's final FOMC meeting.

Portfolio management experts seem to agree Powell will continue the Fed's slow but steady raising of rates, essentially following in Yellen's footsteps.

"His expectation is that he will gradually raise interest rates, and as well gradually reduce the balance sheet," Chad Morganlander, a financial strategist and CNBC contributor, told the cable network's "Trading Nation."

Hilsenrath noted that in Powell's four years on the Fed's board of governors, he's been predominantly "by the book," having never dissented from the majority opinion.

"If all goes as planned for Gov. Powell, the Fed and the economy are going to be on a 'steady as she goes' path for the next several years," Hilsenrath predicted.

First chair not to have a doctorate in over 40 years
At the same time, some economists have questioned Powell's nomination, noting that if confirmed, he'd be the first Fed chair not to have a doctorate in economics since the late 1970s, as the 64-year-old began his professional career as a lawyer.

But as Mark Zandi of Moody's Analytics explained to The Washington Post, not having a Ph.D is hardly disqualifying.

"Setting monetary policy [i.e. interest rates and credit conditions] in most economic environments is pretty straightforward," Zandi said. "I don't think a Ph.D from an Ivy League school is needed."

Powell is also familiar with the goings-on in Washington, having served in the Treasury Department during George H.W. Bush's administration and as a member of the Board of Governors since 2012, nominated by then President Barack Obama.

Should the Fed continue its sporadic rate hike trend, as most experts seem to believe, it would come as no surprise to investors either. Seventy percent of respondents in a recent American Association of Individual Investors poll said they expect interest rates to maintain their gradual ascent. Furthermore, 20 percent don't believe this will substantially influence the markets one way or the other.

Investment management is a reaction-based task, with decisions often guided by market forces. Whatever is in store for the Fed and stock valuations, Miles Capital will continue to keep its clients informed on the very latest, providing customized solutions that can help them achieve their desired ends.

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