General

The nomination of the Fed chairman has attracted much attention. According to Xinhua News Agency, US President Biden nominated Jerome Powell for re-election as Chairman of the Federal Reserve Board on November 22. It is understood that if the nomination is approved by the Senate of Congress, Powell will start a second four-year term in February 2022.

u3000u3000 At the same time, on the same day, Biden also nominated the current Fed Governor Lyle Brainard to replace Richard Clarida as the Fed Vice Chairman. Clarida's term will end on January 31 next year.

u3000u3000 What is the significance of Biden's nomination of Powell at the current time? What challenges will Powell face after being re-elected? How will the US monetary policy change? Will the interest rate hike be advanced?

u3000u3000 On November 22, 2021 local time, Washington, USA, US President Biden announced the nomination of Jerome Powell as chairman of the Federal Reserve.

u3000u3000In line with market expectations

u3000u3000 Powell's re-election helps maintain consistency in monetary policy

u3000u3000 Tang Jianwei, chief researcher of the Bank of Communications Financial Research Center, told Shell Finance reporter that Powell's re-election as the chairman of the Federal Reserve is in line with market expectations. First, the three major U.S. stock indexes collectively rose after the opening, indicating that the market welcomed the appointment; second, the US Treasury Secretary Yellen and the heads of many financial institutions were optimistic about Powell's re-election.

u3000u3000 In his view, Powell's re-election as the chairman of the Federal Reserve will help maintain the consistency and flexibility of the Federal Reserve's monetary policy.

u3000u3000Teng Tai, dean of the Wanbo New Economic Research Institute, agrees that Powell's re-election will have certain advantages in maintaining the continuity of the current US monetary policy.

u3000u3000 It is understood that high inflation in the United States has reached a record high in decades. The United States has not stopped quantitative easing since the 2008 subprime mortgage crisis, especially since 2020, the United States has aggravated the flood of inflation through unprecedented quantitative easing and zero interest rate policy.

u3000u3000Teng Tai pointed out that it is not only the United States facing this phenomenon, Europe has continued to release water since the European debt crisis, and Japan’s quantitative easing policy has also continued for many years. However, the years of quantitative easing in these countries have not caused a significant increase before. Therefore, since the epidemic, countries have once again carried out quantitative easing. Although this is helpless, it eventually led to inflation.

"I personally think that the cumulative amount of currency issued over a long period of time is superimposed on last year’s “great indulgence”. Inflation is not a short-term phenomenon like the Fed’s fantasy. Once it starts to pay for past mistakes, it will take 5-10 years to absorb the cumulative Excessive currency liquidity.” Teng Tai said that in this case, the reason why he did not dare to change is because he was afraid that the policy would usher in a huge shift.

u3000u3000 In his view, once a rapid monetary policy shift, withdrawing from, tightening quantitative easing, or even raising interest rates in response to inflation, it may puncture the huge stock market bubble and real estate bubble represented by the United States. "In case of a puncture, the consequences may be catastrophic."

u3000u3000 Therefore, in order to avoid a sharp turn in policy, continuing to nominate Powell as the chairman of the Federal Reserve will help maintain policy continuity.

u3000u3000 Powell faces a "dilemma" in the future

u3000u3000 Maintaining policy stability VS constrained inflation control ability

At the November interest rate meeting, the Federal Reserve has just officially announced its plan to cut asset purchases (Taper). The meeting stated that the U.S. economy has made further substantive progress. It will start implementing Taper in late November, reducing 10 billion monthly U.S. dollar treasury bonds and a $5 billion institutional mortgage backed the purchase of securities. Other monetary policies remained basically unchanged, including maintaining the federal funds rate (0 to 0.25%) unchanged.

u3000u3000 At that time, the market judged that the reduction efforts at this point basically met market expectations. In the future, the most noteworthy issue of US monetary policy is how the Fed gradually adjusts its inflation position within the traditional framework, and how the Fed chooses the appropriate pace of interest rate hikes based on the state of the US economy after the epidemic.

u3000u3000 The team of Zhong Zhengsheng, chief economist of Ping An Securities, believes that because the stagflation situation in the US economy has not been significantly eased, and the Fed's guidance on interest rate hike expectations is obviously insufficient, negative market sentiment is rising. At present, the Fed will face new challenges in the second half of its “turn”.

u3000u3000 In his view, the Fed significantly underestimated the inflationary pressures in the United States in the first half of this year. The Fed’s "temporary inflation theory" may play a role in guiding market expectations, but the market at this stage may not necessarily "buy it." First, the market is worried that the Fed is still underestimating inflationary pressures. Second, the market recognizes that the Fed's ability to control inflation is more constrained in a "stagflation-like" economic situation.

u3000u3000Zhong Zhengsheng said that if the future development of inflation and employment continues to deviate, the market is still unclear whether the Fed’s policy will be biased towards “stagnation” or “inflation”. Finally, once the inflation theory is falsified by actual data or the official attitude changes, market sentiment is prone to violent fluctuations, as reflected in the recent rise in market inflation expectations and interest rate hike expectations in advance.

u3000u3000 It is worth noting that when the Fed is "turning", it is difficult for the market not to examine the rationality of high asset prices. Since the beginning of this year, the US S&P 500 Index has set a record high of more than 60 times, with a cumulative increase of 25%. The price of high-yield corporate bonds in the United States is at a historical high, reflecting that the market’s risk appetite remains high.

u3000u3000 "As prices rise, the sentiment of fear of heights may intensify market volatility. The short-term deviation of asset prices from the fundamentals of the US economy is another source of risk." Zhong Zhengsheng said.

"In fact, both the United States, Europe, and Japan are facing a dilemma, that is, how to maintain the continuity of monetary policy. If there is no rapid tightening, inflation will not come down; once the contraction is too tight, it may puncture asset bubbles and cause Economic recession.” Teng Tai emphasized that how to balance the dilemma is the biggest choice Powell faces after his re-election.

u3000u3000Tengtai believes that “it can be expected that the withdrawal of US monetary policy in the future will not be too sharp, nor will it rapidly tighten or raise interest rates, but this means that inflation will continue to spread.”

u3000u3000Taper is about to start superimposing two nominees

u3000u3000 Will the Fed raise interest rates earlier?

u3000u3000 The market continues to pay attention to the hidden worries of interest rate hikes. It is understood that since October, the market's expectations for the Fed's interest rate hike have been greatly advanced, especially with the approach and launch of Taper.

u3000u3000 Zhong Zhengsheng believes that the relationship between Taper and interest rate hikes is subtle. At present, the Fed judges that the job market has made "further substantive progress", which means that it is closer to the "maximum employment" required for interest rate hikes. At the same time, the pace of Taper and when it will end will affect whether the Fed has the flexibility to raise interest rates earlier.

u3000u3000 "However, the current Fed's guidance for raising interest rates is very limited. Once the Fed chooses to speed up Taper, this move may signal the Fed's lack of confidence in inflation trends and hope to raise interest rates early, and the risk of market volatility will rise at that time."

u3000u3000Tang Jianwei believes that the current level of inflation in the United States is still running at a high level. Against the background of rising inflation, Fed Chairman Powell officially launched Taper and does not rule out the possibility of raising interest rates early in 2022 in order to maintain the normal operation of the US economy. While maintaining the consistency of monetary policy, the Fed also needs a certain degree of policy flexibility.

u3000u3000 It is worth noting that Powell is dovish in the rate hike rhythm, and the other candidate, Brainard, is more dovish. Tang Jianwei pointed out that Brainard is the most dovish member of the Federal Open Market Committee, and he has said that he should not rush to raise interest rates before achieving full employment. If she takes over, the timing of the rate hike may be delayed accordingly. This may not be a good choice for the US economy.