Daily Brief - What will happen to stocks if Powell is out? (Oct 4, 2021)

“You are a dangerous man to lead the Fed” is, paraphrasing only slightly, what Sen. Warren told Federal Reserve Chairman Jerome Powell when he testified before the Senate Banking Committee on Tuesday of last week.

On its face, Warren’s opposition seems safe to dismiss. After all, many politicians use televised hearings to grandstand and zing. But the market was listening and it didn’t like what it saw.

Powell’s odds of renomination hovered around 80% to 90% in recent months, according to PredictIt. He is still the clear favorite. But the odds dropped precipitously after Tuesday’s hearing, to about 60%, as Lael Brainard’s stock began to rise.

The issue to grapple with is how badly does Sen. Warren want Powell gone, and how closely is President Joe Biden listening?

It’s clear that the progressive wing of the Democratic party wields considerable power. Biden’s two-tracked budget remains stuck as the House progressives refuse to vote for the bipartisan $1.2 trillion infrastructure bill that has passed the Senate.

Among the progressives, Sen. Warren appears to have had significant influence already on the current administration’s nominees. Two prominent regulatory spots (FTC and CFPB) have gone to the candidates she backed. Fed presidents Kaplan and Rosengren resigned shortly after Warren’s call to ban ownership and trading of individual stocks by senior Fed officials.

Ok, so what?

Although there may be some turbulence if markets lose a popular Fed chief - aggressive in his pandemic response and careful in communicating monetary policy - the upshot is that we are likely to end up with an EVEN MORE dovish Chairman. Lael Brainard’s record suggests investors would have to balance the benefit of low interest rates for even longer with the rising risk that the Fed is already behind the inflation curve.

Bad for bonds, good for stocks then?

Yes. Until markets start fretting that Powell, rather than inflation as he claims, was transitory.