Economic Analysis - Powell Represents Status Quo, But Markets Underestimating Hikes - JAN 2018

BMI View: The announcement of Jerome Powell as the nominee to serve as the next chair of the US Federal Reserve is unlikely to be a game-changer for monetary policy. However, t he likelihood of a slightly more hawkish composition of the FOMC in 2018, and clearer signs that core inflation will pick up over the coming quarters, have prompted us to raise our forecasts for the be nchmark Fed funds rate.

Jerome 'Jay' Powell is set to become the next Chair of the Board of Governors of the Federal Reserve, President Donald Trump announced on November 2. Assuming his nomination is confirmed by the Senate, Powell would succeed current chair Janet Yellen in February 2018. As a member of the Fed's policy-setting Federal Open Market Committee (FOMC) since 2012, and a former investment banker and US Treasury official, Powell is a relatively safe pair of hands, particularly when compared with some of the outside candidates being floated ahead of the announcement. Our basic take on Powell is that the direction of Fed policy from the top is unlikely to change much ( see ' Central Bank Watch: Rate Hold To Be Overshadowed By Fed Chair Pick ' , 31 October). On the margins, we assume that he is slightly more hawkish than Yellen, and is likely to take a slightly more lax approach on bank regulation, although public statements suggest he is generally supportive of the current supervisory regime (including the Dodd-Frank Act).

Even so, we have revised up our end-2017 Fed funds rate forecast from 1.00-1.25% to 1.25-1.50%, reflecting the increasing probability of a 25bps rate hike in December. There is roughly a 90% probability of such a hike in futures markets, suggesting that it would take a very negative unforeseen event to put the Fed off course. We still expect 50bps of hikes in each of 2018 and 2019. In total, this implies a 25bps increase to our end-2019 Fed funds rate forecast, from 2.00-2.25% to 2.25-2.50%. For 2018 and 2019, this keeps us above the futures markets, which we believe are still under-pricing hikes, but below the FOMC itself.

Futures Market Too Low, Fed Voters Too High
US - Fed Funds Rate, %
Figures represent midpoint of Fed funds range; FOMC projections from September 2017 meeting. Source: Bloomberg, BMI

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