November 3, 2017

BBT Perspectives Market Spotlight November 2017

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.”     – From the Nov. 1, 2017, Federal Open Market Committee

Wednesday’s status quo Federal Open Market Committee (FOMC) meeting was overshadowed by Thursday’s anticipated nomination of a new Fed chair. On Thursday afternoon President Trump nominated Jerome (Jay) Powell to lead the Federal Reserve beginning in 2018. The selection of Powell gives the White House a safe choice for monetary policy continuity while also leaving its own mark on the Fed’s makeup. This was a widely telegraphed announcement that markets should take in stride but should not be interpreted as a status quo Fed.

President Trump has the potential to name five of the seven Fed governors within his first year in office. The chairperson is undoubtedly the MVP of the Fed team, but markets must remember the rest of the team has yet to be drafted.

Briefly, who is Jay Powell?

  • Fed governor since 2012 nominated by President Obama
  • Worked in the Treasury department under George H.W. Bush
  • Attorney and investment banker
  • Would be first noneconomist Fed chair since William Miller in 1978-1979

Some of his key beliefs:

  • Moderate policy leanings
  • Maintain current path of careful balance sheet reduction and interest rate normalization
  • As a noneconomist, his approach may be less academic and more business-like
  • Shrink monetary policy gaps to better equip the Fed for future economic downturns
  • Would support roll back of some Dodd-Frank provisions assumed by the Fed in 2010, which could be supportive of small to mid-sized banks

In short, a Powell-led Fed is expected to have little impact on the current path of rising interest rates or broad equity prices. He is expected to be a stronger proponent of financial deregulation than Janet Yellen. In fact, with the recent addition of Randy Quarles as Fed governor and vice-chair for bank supervision, the markets may currently be underestimating the magnitude of financial deregulation under a Trump-appointed Fed. If correct, this could lend support to bank stocks.

The Untold Story: This is Key!

The FOMC is comprised of 12 voting members.

  • Seven Fed governors who vote permanently
  • The N.Y. Fed president who votes permanently
  • Four of 11 Federal Reserve Bank regional presidents who rotate in one-year terms

The table below illustrates the current make-up of the FOMC and the upcoming 2018 voting members.

Bottom Line:  In 2018, two current dovish voting members will rotate off the FOMC and three new hawkish members will rotate on the FOMC. With the added probability of three new Fed governor appointments as soon as early 2018, the upcoming FOMC voting members may tilt more hawkish than the current FOMC. This is a bigger story than Powell!

BBT Perspectives Market Spotlight 2017 Fed 2018

To illustrate our point:

Excerpts from recent speeches by departing dovish voters:

Kashkari, Sept. 25: “The Fed should be under no pressure to raise rates…I don’t see inflation taking off so I see no need to tap the brakes.”

Evans, Oct. 11:  “There’s room for a very honest discussion later this year as to whether or not it’s the right time to raise rates.”

Excerpts from recent speeches by upcoming hawkish voters:

Harker, Oct. 17: “So I have three rate increases for this year. I wouldn’t say ‘light pencil.’ ‘Pencil.’”

Mester, Oct. 20:  “My forecast suggests we need an upwardly tilted funds rate path.”

Williams, Oct.11: “If growth were to increase too much, it could lead to a financial bubble or other problems like high inflation. This is exactly what we want to avoid.”

Final Thoughts: A Powell-led Fed will not rock the boat. Monetary policy should remain on a resolute path of gradually rising rates and balance sheet reduction. He may promote a more aggressive tone toward financial deregulation and is more likely to communicate Fed policy from the viewpoint of a business person rather than an academic. They will keep a keen eye on the same data they always do but will likely have a heightened interest in reducing monetary policy gap so they are better equipped to handle future economic downturns better than in 2008-2009. Markets should be calmed by this selection as he is a known entity just like Janet Yellen was.

The most important part of future Fed deliberations will be its interaction with the newly proposed tax reform laws released just on Thursday. Policy execution between the Fed and Capitol Hill must strike a careful balance that is well implemented. We remain in the late stages of economic recovery, but financial assets should continue to have fundamental economic and policy support to carry us well into 2018.

November 3, 2017

BBT Perspectives Market Spotlight November 2017

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.”     – From the Nov. 1, 2017, Federal Open Market Committee

Wednesday’s status quo Federal Open Market Committee (FOMC) meeting was overshadowed by Thursday’s anticipated nomination of a new Fed chair. On Thursday afternoon President Trump nominated Jerome (Jay) Powell to lead the Federal Reserve beginning in 2018. The selection of Powell gives the White House a safe choice for monetary policy continuity while also leaving its own mark on the Fed’s makeup. This was a widely telegraphed announcement that markets should take in stride but should not be interpreted as a status quo Fed.

President Trump has the potential to name five of the seven Fed governors within his first year in office. The chairperson is undoubtedly the MVP of the Fed team, but markets must remember the rest of the team has yet to be drafted.

 

Briefly, who is Jay Powell?
  • Fed governor since 2012 nominated by President Obama
  • Worked in the Treasury department under George H.W. Bush
  • Attorney and investment banker
  • Would be first noneconomist Fed chair since William Miller in 1978-1979

Some of his key beliefs:

  • Moderate policy leanings
  • Maintain current path of careful balance sheet reduction and interest rate normalization
  • As a noneconomist, his approach may be less academic and more business-like
  • Shrink monetary policy gaps to better equip the Fed for future economic downturns
  • Would support roll back of some Dodd-Frank provisions assumed by the Fed in 2010, which could be supportive of small to mid-sized banks

In short, a Powell-led Fed is expected to have little impact on the current path of rising interest rates or broad equity prices. He is expected to be a stronger proponent of financial deregulation than Janet Yellen. In fact, with the recent addition of Randy Quarles as Fed governor and vice-chair for bank supervision, the markets may currently be underestimating the magnitude of financial deregulation under a Trump-appointed Fed. If correct, this could lend support to bank stocks.

The Untold Story: This is Key!

The FOMC is comprised of 12 voting members.

  • Seven Fed governors who vote permanently
  • The N.Y. Fed president who votes permanently
  • Four of 11 Federal Reserve Bank regional presidents who rotate in one-year terms

The table below illustrates the current make-up of the FOMC and the upcoming 2018 voting members.

Bottom Line:  In 2018, two current dovish voting members will rotate off the FOMC and three new hawkish members will rotate on the FOMC. With the added probability of three new Fed governor appointments as soon as early 2018, the upcoming FOMC voting members may tilt more hawkish than the current FOMC. This is a bigger story than Powell!

BBT Perspectives Market Spotlight 2017 Fed 2018

To illustrate our point:

Excerpts from recent speeches by departing dovish voters:

Kashkari, Sept. 25: “The Fed should be under no pressure to raise rates…I don’t see inflation taking off so I see no need to tap the brakes.”

Evans, Oct. 11:  “There’s room for a very honest discussion later this year as to whether or not it’s the right time to raise rates.”

Excerpts from recent speeches by upcoming hawkish voters:

Harker, Oct. 17: “So I have three rate increases for this year. I wouldn’t say ‘light pencil.’ ‘Pencil.’”

Mester, Oct. 20:  “My forecast suggests we need an upwardly tilted funds rate path.”

Williams, Oct.11: “If growth were to increase too much, it could lead to a financial bubble or other problems like high inflation. This is exactly what we want to avoid.”

Final Thoughts: A Powell-led Fed will not rock the boat. Monetary policy should remain on a resolute path of gradually rising rates and balance sheet reduction. He may promote a more aggressive tone toward financial deregulation and is more likely to communicate Fed policy from the viewpoint of a business person rather than an academic. They will keep a keen eye on the same data they always do but will likely have a heightened interest in reducing monetary policy gap so they are better equipped to handle future economic downturns better than in 2008-2009. Markets should be calmed by this selection as he is a known entity just like Janet Yellen was.

The most important part of future Fed deliberations will be its interaction with the newly proposed tax reform laws released just on Thursday. Policy execution between the Fed and Capitol Hill must strike a careful balance that is well implemented. We remain in the late stages of economic recovery, but financial assets should continue to have fundamental economic and policy support to carry us well into 2018.

Sources: Sources: Strategas Research Partners, Evercore ISI, FactSet, Barron’s, CNBC.com

This piece is produced by BB&T’s Wealth Portfolio Management Team.

The information set forth herein was obtained from sources, which we believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Diversifying investments does not ensure against market loss and asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Past performance does not guarantee future results.