Daily Brief - And the next Fed chair is … (Nov 22, 2021)

He could be out by Turkey Day. Jerome Powell’s days presiding over the most remarkable bull market in at least two decades may be numbered. President Biden is expected to announce his nominee for Federal Reserve chair before Thanksgiving, and Powell’s chances seem to be sliding.

Political betting site gives Powell at 67%. That’s still better than a coin toss but a month ago, his chances for renomination stood at 72%.

His opponent, Lael Brainard, is the sole Democrat on the Fed Board of Governors. She is seen as the more progressive choice of the two. A tougher stance on bank regulation and the Fed’s role in combating climate change are the two feathers in her cap that help her popularity with the left wing of the Democrat party.

However, it is unclear whether she could garner the same number of votes on both sides of the aisle as Powell could. Sen. Manchin, a centrist that has been at the center of many landmark bills lately, also holds a key vote in the Senate’s narrow majority. While the power of his vote may be diluted if Biden re-nominates Powell (who enjoys broader support), he may be a crucial figure if Brainard secures the nomination.

Ok, tell me why I should care?

If Lael Brainard is named Federal Reserve chair, the first move by financial markets may be to price in an even more dovish central bank. In particular, the yield curve could steepen to price in a higher inflation path.

In reality, the differences between the two - based on the ample record of past statements - don’t really bear that out.

However, market perception is that Powell will be much less concerned about the midterm elections in determining the path of future interest rate hikes. Brainard, in contrast, is sometimes seen as more politically attuned, including her embrace of the climate change battle as a Fed objective.

While possibly good for stocks (in the short term) and bad for bonds, Brainard is seen as a very welcome change by the cryptocurrency community. She has been much more vocal and open-minded about Fed’s involvement in this space.

Here is what the history says: the stock market has posted a near 4% median gain in the first six months of a new Fed chair and has risen two-thirds of the time.

Oh, well, it’s just another rally …