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Multi-Asset Blog - The next Master of the Universe

Tuesday, October 17, 2017

Will Bartleet, CIO and Portfolio Manager of Pacific Multi-Asset
Who will be the next Governor of the Federal Reserve?

One of the most influential leaders in the world will be appointed soon. You won’t have been able to vote for the candidates, nor will any of your neighbours. But don’t worry, the appointment will be decided by a wise leader, the 45th President of the United States, Donald Trump. Yes soon, we will know who will be the next Governor of the Federal Reserve.

Even if you are American, you may believe that this is overstating the importance of this role, the leader of an institution that has only been in existence for 100 years and has just twelve members. But since the Great Financial Crisis, central bankers’ actions have had huge ramifications for both the economy and capital markets, earning them the title of Masters of the Universe. And no central banker has more power and influence than the Governor of the Federal Reserve.

The choice matters, as the potential candidates have differing views on the path for interest rates in the US ranging from doves (favouring lower interest rates) to hawks (higher interest rates). And although the Fed only sets interest rates for the US, its influence is felt all over the world. We won’t even attempt to second guess President Trump, who has difficulty maintaining a consistent view on pretty much anything, including the incumbent Fed Chair, Janet Yellen whom he attacked during his presidential campaign. Instead we will simply outline the most likely candidates:

Janet Yellen (current Chair) – until recently Janet Yellen was thought by many to be a “super dove”, in the mould of her predecessor Ben Bernanke. Now the Federal Reserve has raised rates four times under Yellen’s leadership, even in the face of low inflation. Yellen has not said If she would accept a second term if offered.

Jerome Powell – Jay Powell has been a member of the Federal Reserve Board of Governors since 2012 and has never dissented on any vote since then. A Republican, he worked as undersecretary of the Treasury under George W Bush. Powell is the candidate most likely to maintain the status quo, which may be at odds with Trump’s goal to deregulate the banks.

Kevin Warsh – a hawkish contender who opposed the second round of quantitative easing (QE2) when he sat on the board of the Federal Reserve under Ben Bernanke. His views on the deregulation of banks supports the Trump administration’s plan for higher growth through reducing regulations. It remains to be seen whether his wife’s family ties with the Trump family boost his odds of appointment.

Gary Cohn – seen as favourite for the role until the summer, the ex-Goldman Sachs investment banker is chief economic advisor to President Donald Trump. Little is known about his views on the economy and interest rates – he was Chief Operating Officer at Goldman – but his odds of success have plummeted following his criticism of Trump following the shocking violence in Charlottesville.

John Taylor – stands apart from all the other candidates as it’s possible to calculate his views using a simple formula: the Taylor Rule. This calculates the appropriate level of interest rates given the prevailing inflation and unemployment rate. The answer: 3.75%, considerably higher than they are today. If Taylor is named the next Governor, the market will need to brace itself for higher rates.

IMPORTANT INFORMATION | Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.


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