Home Morning Commentary Morning Commentary – Federal Reserve

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There was big news from (for) the Federal Reserve bank today.  The FOMC ended a 2-day meeting and gave it’s outlook for the future.  There was also news “for” the Federal Reserve today as well: It will have a new Chairman very soon – Jerome Powell.

As was widely expected, the FOMC didn’t say much that was new or otherwise surprising.  Because of this, rate hike odds for the December meeting moved up from 85% to 87.5%.  There’s no need to go over the whole statement, as the following three sum it all up.

 

  • “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize”   
  • “Near-term risks to the economic outlook appear roughly balanced”   
  • “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate”

As mentioned above, what was new for the Fed was Wednesday’s Wall Street Journal’s story of a new Chairman to replace Janet Yellen, which will be Jerome Powell.  From their story https://www.wsj.com/articles/trump-to-tap-feds-jerome-powell-for-fed-chairman-1509568166 we read the following highlights.

On Interest Rates

Mr. Powell, 64 years old, has backed Ms. Yellen’s policy of gradually raising interest rates if the economy improves as projected. In recent public remarks he has sounded an optimistic note, saying he expects inflation to move up to the Fed’s 2% target, economic growth to remain steady and the unemployment rate to fall further. “I would view it as appropriate to continue to gradually raise rates,” he said in June.

On Shrinking the Fed’s Portfolio

Mr. Powell in September voted in favor of beginning the yearslong process of winding down the central bank’s $4.5 trillion portfolio. Like Ms. Yellen, Mr. Powell has said the Fed could resort to new rounds of asset purchases in another crisis if the economy needs more stimulus. Putting new assets on the Fed’s balance sheet should be an option “only in extraordinary circumstances,” he said in February.

On Dodd Frank

Mr. Powell has expressed willingness to ease some of the burdens imposed on financial institutions from the 2010 Dodd Frank law, a position that could appeal to the Trump administration.

Speaking before lawmakers in June, Mr. Powell said he was looking into softening the Volcker rule preventing banks for making overly risky bets with their own money. He also said it might be appropriate to ease some of the annual stress tests that big banks must perform.

He has also called for revisiting new supervisory requirements imposed on bank boards of directors after the crisis. In his view, a board’s role “is one of oversight, not management.” That, he said in a 2015 speech, means boards should not be saddled with “an ever-increasing checklist.”

Jerome Powell will be the first former investment banker to become Fed Chair (and first non-economics PhD in 40 years).

Powell, a Princeton graduate, was a lawyer in New York before he joined the investment bank Dillon Reed & Co. in 1984. He stayed there until he joined the Treasury Department in 1990. After he left Treasury, he became a partner in 1997 at The Carlyle Group (CG), the private equity and asset management giant. He left Carlyle in 2005.

Since change is a good thing, we are anxiously awaiting the change in the Chairman’s leadership.

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