Market Priced in Faster Rate Hike after Powell’s Nomination for Second Term

Hawks were thrilled with Biden’s nomination of Jerome Powell for the second term, thinking that his chairmanship would lead to more rate hikes in the coming year, than that of Lael Brainard, initially viewed as the leading candidate of the Fed Chair in the next term. She is now nominated as the vice chairman. US dollar strengthened and gold plunged on heightened speculation of the first Fed fund rate hike. The market has now fully priced in a rate hike in June 2022, compared with July 2022 a week ago.

After nomination, Brainard vowed to bring down inflation. As she suggested, “I’m committed to putting working Americans at the center of my work at the Federal Reserve…this means getting inflation down at a time when people are focused on their jobs and how far their paychecks will go”. The stance appears in line with that of Powell, who pledged to “use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched”.

While Brainard and Powell, as well as the FOMC members, viewed inflation as transitory, she is viewed as more dovish that Powell as she appeared more concerned about economic recovery than high inflation. Back in September, Brainard noted in a speech that she expected “inflation to decelerate, and pre-covid inflation dynamics to return when Covid disruptions dissipate”. She added that employment remained below the levels seen before the pandemic, with the delta variant continued to inflict damage on the economy. The comments were made after the September FOMC meeting, at which the Fed gave advance notice on QE tapering by noting that a reduction in the pace of asset purchases “may soon be warranted”.

The median dot plots, with 9 out of 18 members projected the first rate hike in 2022, also revealed that members pushed forward the timing of the first rate hike. The staff projection also showed that the policy rate would increase to 0.3% next year, up from the current 0.1%. This would be followed by further increase to 1% in 2023 and 1.8% in 2024. The longer-term policy rate will stay at 2.5%.

The price reaction could be explained by the market’s confidence about Powell given his track record over the past years, while a new chair would more or less involve some sort of uncertainty. Yet, one should not be overestimate the authority of a Fed chair as a monetary policy decision is made by voting.