News: What Experts Expect From Powell’s Second Term as Fed Chair

Despite political differences, President Joe Biden has nominated Jerome Powell, a Republican, to a second term as the chairman of the Federal Reserve. Biden chose Powell over Democrat  Lael Brainard.

Powell has helped guide the Fed and U.S. economy through the unpredictable COVID-19 outbreak with careful policy adjustments. These included buying $120 billion in Treasury bonds and mortgage-backed securities to help keep interest rates low. He also helped the Fed launch a range of lending programs to keep fixed-income markets operating. 

Powell’s renomination has been met by positive and negative views. Here’s what we can expect from Powell, according to experts. 

He’ll take hawkish stance on inflation

Many investors quickly adjusted their strategies, betting Powell will become more hawkish on inflation. That means he could take aggressive action to slow our quickly rising prices. This will include cutting back on bond purchases, which is already in the works, and likely raising interest rates. 

Tapering bond purchases and increasing interest rates are seen as the two most actionable ways the Fed can cool our rapid inflation, which is at a 31-year high. 

We’re already seeing the results of this, as bond yields, which trend in the opposite direction of consumer prices, have risen as Fed support has dwindled. The two-year Treasury note has increased to 0.639%, which is the highest it’s been since March 2020. Also, the 10-year Treasury note jumped from 1.55% to 1.655% in just four days. 

Without nomination looming, rate hikes will come

Since he doesn’t need to worry about renomination for four years, investors are now leaning toward the idea that Powell is free to act as he sees fit.

In a Business Insider article, Peter van Dooijeweert, a managing director at the investment company Man Group, was quoted as saying, "What does that do to his somewhat dovish bias, does it make him slightly more hawkish because he's free for four years to do what [he sees as] right?”

He also said, “They are expecting him to be more hawkish and that rate rises will come earlier."

Investors believe the Fed will raise interest rates three times in the next year. The Bloomberg interest rate probability tool showed they thought there were only two hikes on the horizon just two weeks ago. 

Policies skewed toward maximum employment

The Fed doesn’t just manage interest rates. Congress also empowers it to maximize employment in the U.S. While the unemployment rate continues to inch toward pre-pandemic levels — it currently sits at 4.2%, 0.7 percentage points higher than pre-pandemic levels — there is still a massive labor shortage. It’s the worst worker shortage we’ve experienced since the 1990s.

With a lack of jobs no longer being the issue and rising wages in many of the Fed’s districts not helping, the Fed may need to develop policies to get workers back on the job. This may end up being one of Powell’s key initiatives — along with the White House — after addressing inflation. 

Changes will be slow, according to others

Some economists aren’t quite sold on the assumption Powell will take an even more hawkish stance on inflation and interest rates. Many have seen his recent hesitancy toward raising interest rates as a sign he will be slow and methodical with his changes. 

“The president chose the status quo for monetary policy and financial regulation,” according to Mark Zandi, chief economist at Moody’s Analytics. Zandi continued, “The Fed’s going to slowly but steadily take its foot off the monetary accelerator.”

From the experts’ eyes, it’s clear there is little agreement in how Powell will change the Fed in his second term — or if he’ll change anything at all. 

What we do know is the bond tapering is already planned. However, we’ll have to take a wait-and-see approach on any other potential policy changes and whether he assumes a more hawkish stance or not.