Markets see June liftoff on US rate hikes after Biden sticks with Powell to lead Fed

WASHINGTON (BLOOMBERG, REUTERS) – Traders are pricing in a ramp-up in tapering bond purchases by the US Federal Reserve and the potential for a June liftoff on rate hikes after President Joe Biden selected Jerome Powell to serve another four years as the central bank’s chair.

Futures on the federal funds rate, which track short-term interest rate expectations, have fully priced in a quarter-point tightening by next June, up from more than 90 per cent before Mr Biden’s announcement.

The simple fact that the pick is now out of the way may allow the Fed to turn slightly more hawkish, said analysts.

There has been a notable repricing already, related in large part to the fact that Lael Brainard – the candidate that Mr Biden did not tap to lead the Fed – was perceived as potentially less inclined to tighten policy than incumbent Mr Powell. But the removal of some concerns over renomination could also allow Mr Powell himself to cut loose a little more and follow the kind of less-expansive policy that some many observers believe is warranted.

While the leadership of the US central bank is always important to markets, Mr Biden’s decision takes on heightened significance this year as the Fed starts tapering its US$120 billion in monthly bond purchases.

At the same time, the Fed is confronting an historic surge of inflation as global supply chains remain disrupted by the Covid-19 pandemic.

Mark Cabana, head of US interest rates strategy at Bank of America, is one observer who sees the door open to a more hawkish stance by Mr Powell.

“The announcement today should allow the Fed to pivot, to acknowledge the upside risks from inflation and they can begin to talk about how they will respond,” he said on Bloomberg Television. In many ways, the Fed leadership had been “somewhat constrained in making this pivot” by the uncertainty over the nomination decision, he said.

The continuity that Mr Powell provides is also potentially a factor for the path the Federal Open Market Committee (FOMC) takes. It would have taken some time for Ms Brainard to get her feet officially under the desk, potentially delaying any shift as Mr Powell would be something of a lame duck incumbent if not renominated.

Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said that Ms Brainard taking the vice chair role “at least puts some kind of pressure on Mr Powell to not to move too quickly with raising rates.”

Ms Brainard, who was nominated to the Fed board by former President Barack Obama in 2014, is widely seen as more dovish than Mr Powell in part because of her push to retain super-easy monetary policy until there is more progress on job recovery.

A more hawkish shift could see an extension of the move that’s already brought pricing of the Fed’s first full quarter-point rate increase forward to June 2022, and the release of this week’s FOMC minutes could add extra impetus potentially too.

Analysts at NatWest said that while in a high inflation environment the difference between Mr Powell and Ms Brainard would be “basically nil”, they said “it is possible one can argue a taper acceleration” is more likely in December under Mr Powell.

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