Meet the New Fed Head, Same as the Old Fed Head (Literally)

We have a decision! After holding the country in suspense for weeks, President Joe Biden announced on Monday that he has tapped Fed head Jerome Powell for another term. Fed Governor Lael Brainard, whom some observers had tipped as a potential replacement, got tapped as Vice Chair, while Powell will continue steering monetary policy. Naturally, pundits are now speculating at what the latest news means for monetary policy—an endeavor we think is fruitless and pointless. Yet the news does reduce uncertainty over Fed personnel—uncertainty that will likely fall further in the coming weeks, as Biden signaled he will soon fill the Fed’s open (and soon-to-open) seats. But we think it is a stretch to glean much impact beyond that.

Powell’s reappointment extends the status quo, and not just of the last four years. For the most part, Powell’s Fed was an extension of former Chair Janet Yellen’s Fed, which mostly extended the policy of her predecessor, Ben Bernanke. All three were cut from the same technocratic cloth, and all three have headed committees of economists and academics. All have followed the same quantitative easing (QE) playbook and left the Fed’s traditional toolkit mostly untouched. We don’t think this has been terribly beneficial, but it is an approach markets are quite familiar with, and stocks have been largely fine with it.

Some argue Powell’s reappointment changes the calculus a bit. The logic goes like this: Powell was holding off on rate hikes or other supposedly major moves in order to raise the likelihood of being reappointed, and now that his job is safe, the coast is clear to tighten monetary policy. Brainard, meanwhile, allegedly would have been more likely to keep rates lower for longer. We think this errs on multiple fronts. One, had Brainard gotten the job, her resume wouldn’t have helped predict her actions, as Fed heads often defy their own past writings and experience. When asked about this, former Fed head William McChesney Martin quipped that when you become head of the Fed, they make you take a little pill that makes you forget everything you once knew, and it lasts as long as you are in the job. When questioned about his own unorthodox decisions, Martin’s successor and rival, Arthur Burns, joked he took “Martin’s little pill.” We think plenty of other Fed heads have also fallen prey, making predictions useless.

Two, Powell is still under the proverbial spell of that humorous metaphorical pill. Forecasts of tighter policy in his second term largely stem from the belief that he is more “hawkish” by nature, but that is a reputation preceding his time as Fed head. We always encourage investors to focus on what Fed people do, and to that end, Powell has already launched a slow wind down of QE that is set to reduce asset purchases to zero next June. What does that mean for a rate hike? Who knows! Last time around, Yellen’s Fed made its first rate hike over a year after QE ended. Maybe Powell similarly waits, maybe not. But if past actions are a guide, he will probably telegraph any move well in advance, as he did with the reduction in QE.

Then too, the Fed head isn’t a monetary policy dictator. The Fed votes by committee, and we don’t yet know who will round out that committee next year. One seat has been open for quite a while. Another will open at the end of December, when outgoing supervisory Vice Chair Randal Quarles steps down. A third becomes vacant in January, when Fed Governor Richard Clarida’s term expires. The Dallas and Boston Fed need new presidents, and whoever gets hired in Boston will have one of the Federal Open Market Committee’s (FOMC’s) rotating seats next year. All Fed people have their own biases, viewpoints, forecasts and interpretations of economic data. Anyone making a firm projection of Fed policy is essentially saying they can predict how over a dozen people will interpret what is essentially unpredictable inbound information. They are also implying they can predict what four unknown, un-hired people will do. It strains credulity, in our view.

The good news, for investors, is that you don’t need to predict monetary policy. It has no pre-set market impact, and monetary policy changes tend to hit the economy at a delay. That gives investors time to carefully weigh the Fed’s decisions after the fact. Knee-jerk reactions are neither necessary nor wise. 

For now, the main upshot is that the uncertainty over who will head the Fed is gone. As Biden rounds out the Fed’s board, which he has signaled he will do over the next few weeks, uncertainty will likely fall further. This isn’t massively bullish or anything, but any news that clears the clouds a wee bit is generally welcome to stocks, in our view. Having more clarity on Fed personnel can help investors move on and get on with it.