- Biden renominated Jerome Powell for a second term as chair of the Federal Reserve; the Senate must confirm him.
- Lael Brainard, until now a governor, would become the institution’s new vice chair.
- Markets read it as continuity at a time of high inflation and gradual withdrawal of stimulus.
On Monday 22 November 2021 US President Joe Biden announced that he will nominate Jerome Powell for a second term as head of the Federal Reserve and Lael Brainard, a governor of the institution, as vice chair. Both appointments must be confirmed by the Senate. Powell’s current term as chair expires in early February 2022.
The decision cleared up a question that had been hanging for weeks and that markets were following closely. The reaction was one of moderate relief: it was read as continuity of a known monetary policy, although stocks closed the day mixed. Analysts described both Powell and Brainard as relatively moderate figures, in favour of withdrawing stimulus cautiously. The Fed has insisted that its decisions will depend on employment and inflation data, not on who chairs it.
Why this appointment matters
The Federal Reserve sets the benchmark interest rates in the United States and manages its balance sheet, and its decisions influence the cost of money around the world. When it raises or lowers rates, or decides to buy or stop buying bonds, the value of the dollar, risk appetite and financing conditions change in emerging economies and in Europe. That is why who chairs it is a matter of global interest.
The US central bank keeps its rates between 0 % and 0.25 % and, in early November, announced that it would begin gradually reducing its monthly bond purchases. With Powell’s continuity, the market reads that the withdrawal of stimulus will follow a predictable path rather than a break with the strategy followed during the pandemic. The combination of two profiles seen as prudent suggests that the pace of normalisation will remain gradual, although that reading could change if inflation surprises on the upside.
Inflation and interest rates
The backdrop is inflation at multi-decade highs. The US consumer price index rose 6.2 % year on year in October, the highest figure in more than thirty years. The Fed has argued so far that much of that increase is transitory, but many analysts doubt that it is, and the market is debating when rate rises will begin, which many expect during 2022.
For Powell, a second term means managing a delicate balance: withdrawing stimulus fast enough to contain prices, but without stalling the recovery or causing turbulence in financial markets. The tone of his coming messages will be scrutinised, because any change in expectations can quickly move stocks and bonds.
What to watch from Europe
Fed decisions affect the euro, European bond yields and the cost of credit. Families with variable-rate mortgages or fixed-income portfolios, and companies with dollar financing or sales in the United States, have reason to follow the course of US monetary policy. In the euro area, inflation has also accelerated in recent months.
Rather than guessing the next move, it is better to know how sensitive your own situation is to rates: what part of the debt is variable, when it renews and how much weight bonds have in the portfolio. This note is for information only and is not an investment recommendation; for any decision, the right step is to consult an adviser. A periodic review of the debt structure and the portfolio avoids deciding in a rush when markets move.
When the course of money changes, it pays to know how much it weighs on your own accounts.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
