Fed Has New Face but Same Look

Gold Outlook Unchanged as Trump Appoints Powell to Chair

United States President Donald J. Trump somewhat unpredictably did the predictable by naming Jerome Powell the new Chair of the Federal Reserve. Fond of adding reality show suspense to his appointments, Mr. Trump did exactly what insiders and pundits foresaw by picking the investment banker from a short list that included current Chair Janet Yellen and close White House economic adviser Gary Cohn.

Market reaction to the selection was hard to gauge, coming as it did on the same day House Republicans introduced its long-awaited legislation to overhaul the U.S. tax code. The Tax Cuts and Jobs Act proposes chopping the corporate tax rate from 35 percent to 20 percent, cutting other business taxes, and eliminating the estate and alternative minimum taxes. These measures would add an estimated $1.5 trillion dollars to the United States debt.

What Changes?

Jerome Powell is largely regarded as a mirror image of his predecessor, only from the GOP side. In fact, he voted for every Fed policy decision under Yellen since he was appointed by Barack Obama in 2012. That includes the FOMC’s determination to raise interest rates slowly but steadily. A recent survey (Evercore ISI) of investors showed a majority believe Mr. Powell will actually kick rates higher than Yellen would have. Otherwise, the incoming Chair has already indicated he wants to preserve the Fed’s core reforms on bank regulation, a position at odds with the White House’s preference for deregulation. “The whole idea is to preserve the significant core reforms that were made but to go back and clean up our work. There are some ideas in the report that make sense, maybe not as expressed there, but it would enable us to reduce the cost of regulation without affecting safety and soundness.” Mr. Powell said.

Just one day previous to the switch at the top, the Fed announced it had decided, for the present, to leave the nation’s benchmark interest rate unchanged, at 1 – 1.25%, by unanimous vote. A third rate increase this year may have been delayed by economic disruptions caused by the violent hurricanes that battered the country this autumn. Otherwise, the Board’s view of the U.S. economy remains one of slow (less than the 2% target) but steady growth and low inflation. Virtually all observers (close to 97%) expect that quarter-point rate bump to come in December, in keeping with this perspective.

The Impact on Gold

After edging downward on nerves in anticipation of the announcement, gold hit a one-week high on the very day, but this was more likely caused by increased demand from Chinese retail investors. As Powell was the race front-runner (considered more likely to win than all the other candidates combined), the result was no surprise at all. And with no monetary policy deviation in sight, the Yellen – Powell transition shows low likelihood of turbulence now, when it officially occurs in February, or onward in the near to medium term. The only possible turn of fate is the necessity of Senate confirmation, and observers regard this as a fait accompli. In an administration marked by an entire year of never-ending novelty and conflict, the Federal Reserve is a relative oasis of calm.

The Take-Away

Everything about the appointment of Jerome Powell as the 16^th Fed Chair points to business as usual. In the polarity between hawks who seek higher interest rates and doves who want them to stay low, Mr. Powell is seen as a “wise owl,” one who will seek consensus amongst the more economics-mind governors already present on the Federal Reserve Board and committees. (Powell is a lawyer by training.) Given that the three people previously in the position were re-appointed by presidents from opposite parties, why was there a change at all? Mr. Trump recently answered that question himself: “You like to make your own mark.”

The bigger question surrounds the impact of the GOP tax plan, particularly the reduction of the corporate rate to 20%. President Trump has promised that it would be a permanent cut, a position that faces resistance within Republican ranks due to its enormous effect on the national debt. This White House has been, to say the least, frustrated by roadblocks to its legislative platform erected with success by Democrats and Republicans alike. What else will the President do, ahead of the 2018 elections, to “make his mark”?