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The last thing Biden needs is a market powerlessness. And Powell saves him from that.

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The building of the Marriner S. Eccles Federal Reserve in Washington, DC

Samuel Corum / Bloomberg

President Joe Biden’s decision to keep Jerome Powell as chairman of the Federal Reserve for a second term while  -pointing Lael Brainard as vice chairman shows he needs no more problems.

He already has declining polls and a fight to get the Senate to  -prove his signature social spending plan. The last thing he needs is a swoon in the stock market.

The decision, tweeted on Monday morning, was welcomed by markets as an acceleration of the Fed’s rate hike schedule for next year. But the stock market seems fine with that.

The futures market for federal funds has further increased the likelihood of an initial 25 basis point increase – one basis point equals 1/100 percentage point – from its current target range of 0% to 0.25% in June 2022, according to the CME FedWatch tool. It shows a second increase of 25 baisis points next September and a better chance of a third increase in December.

The futures markets are notorious for overestimating future Fed moves, but the treasury market is also anticipating higher probabilities of rate hikes coming earlier in the next year. The two-year bond, the most sensitive to Fed expectations, traded at 0.58% in the morning, its high for the year and a sharp six basis points up from its overnight lows in foreign trade. The 10-year benchmark bond traded at 1.61%, also six basis points more than the overnight lows.

The US Dollar Index (DXY) rose sharply and continued its uptrend, rising 7% from its June low. Commodities fell but the stock market was optimistic about the news, with key averages rising 0.8% to 0.9%, all at or near their respective highs. All are in line with a less accommodating Fed policy.

Banks and other financial institutions believed the Fed’s nominations were good news

Select financial sector SPDR

Exchange Traded Fund (XLF) up 1.9%. One possible conclusion from the move is that Brainard did not reach the top spot with the Fed. She has been open about the Fed’s recent decisions to relax some restrictions on banks after the financial crisis, and it was seen as a tougher regulatory stance if she had been at the helm of the central bank.

But Biden’s election also reflects Brainard’s potential problem with getting Senate endorsement for the top spot, both because of her regulatory stance and her reputation as a partisan. As a Democrat, she donated to the Hillary Clinton presidential election in 2016, official records show. Recognition as vice chairman can be less of a problem.

Biden’s tweet highlighted the need for “ongoing, independent” leadership at the central bank. Keeping Powell returns to the earlier practice of presidents re -pointing Fed chiefs  -pointed by their predecessors. For example, President Barack Obama kept Ben Bernanke, originally nominated by George W. Bush. President Ronald Reagan retained the highly independent Paul Volcker, who was Jimmy Carter’s choice. And Alan Greenspan was known to serve as Republican and Democratic presidents during his long tenure from 1987 to 2006.

Former President Donald Trump deviated from this practice by replacing Janet Yellen, a Democrat, with Powell, a Republican. Powell demonstrated his independence by not flinching, despite Trump’s spate of unprecedentedly harsh public criticism of the Fed’s rate hikes, including threats to remove him from office.

In any case, Powell would likely have bipartisan support for a second term, despite Senator Elizabeth Warren (D., Mass) expressing her opposition and calling the Fed chief “a dangerous man” for his stance on regulation. Other senators have accused him of not being strong enough against climate change. It would be surprising, however, if the White House didn’t count the votes for both Fed nominations before it announces them.

In fact, Powell and Brainard differ relatively little in monetary policy. The Fed has started cutting its monthly bond purchases by $ 120 billion. At the current rate of $ 15 billion per month, bond purchases should be completed by the middle of next year. The cessation of asset purchases, a form of monetary policy stimulus, is seen as a necessary precursor to an interest rate hike, a tightening of monetary policy.

Rightly or wrongly, Powell is seen as more willing to proceed with the normalization of current Fed policy. The rate fixation near zero and aggressive bond purchases were introduced shortly after the outbreak of the pandemic in early 2020.

Restoring maximum employment has been the Fed’s priority under Powell ever since. Unemployment has been cut to 4.6%, less than half of its pandemic peak, and a lack of willing labor, not job availability, is the main problem facing the labor market. The other half of the central bank’s mandate, inflation, is more problematic and proving to be more than temporary, officials pointed out.

It’s hard to see Powell as an anti-inflation hawk as consumer prices were 6% higher a year ago. Nevertheless, the markets see a second term as positive, at least for continuity. And with Biden’s political problems, the last thing he needs is a swoon in the stock markets.

Write to Randall W. Forsyth at [email protected]

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