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Meet the New Boss, Same as the Old Boss


Wednesday, November 15, 2017

Jim Stuart, Vice President & Portfolio Manager

Those of you “of a certain age” may recognize the title as the final lyrics of The Who’s 1971 rock classic “Won’t Get Fooled Again.” I don’t know if Pete Townshend created or borrowed those lyrics, but what brings them to mind is President Trump’s nomination of Jerome Powell as the Fed’s Chair, to succeed Janet Yellen when her term expires in early 2018. By almost all of the accounts we’ve seen on this nomination, it appears that Mr. Powell is not likely to lead the Fed in a radically new direction and in fact may pursue policies very, very similar to what we’ve seen from Ms. Yellen.

If confirmed, Mr. Powell would be similar to most of the Fed Chairs of the past several decades in that his background includes work experience at the Fed, elsewhere in the federal government (in his case, in the Treasury Department), and in private business, mostly in investment banking. This gives him a wide view of financial and monetary policy, from outside and inside the Fed. Presumably the totality of that experience gives him an idea of what Fed policy can and cannot accomplish. Based on his recent public comments, it is likely that he will continue the Fed’s cautious approach on interest rates, raising them slowly when deemed necessary and holding off when necessary. He well could be described as a “continuity choice.”

Where his background differs from the Fed chairs of the past four decades is his lack of a Ph.D. in economics. That does not particularly bother us, as his various postings in government and private business give him a lot of practical experience, but as noted by a couple of commentators, it might make him somewhat more likely to depend on the Fed’s staff than his immediate predecessors. Chris Low, Chief Economist of FTN Financial, in that firm’s Economic Weekly of November 3, 2017, had this to say on that point: “Powell’s relationship with the Fed’s huge economics staff will shape his tenure as Chairman. Yellen is an economist with a prodigious reputation, allowing her to push back against staff recommendations. Powell is not an economist. What he knows about it he learned from the Fed staff and he is unlikely to defy them.” My personal opinion is that Mr. Powell did not get to this position by being a pushover or a weakling and I imagine he will assert himself very effectively when he thinks it is appropriate. That doesn’t mean he will deviate greatly from current policies, but I believe he will become his “own man” and will put his own stamp on the Fed, and none of us know now what that stamp will be.

How did financial markets react to this nomination? We think the most notable reaction was that there was no reaction. Investors and traders recognize that under Mr. Powell, things at the Fed won’t change much. In light of the other “walls of worry” facing the markets, a steady hand and calm demeanor, both of which Mr. Powell appears to possess, are just what the markets wanted and needed. In short, we don’t think this nomination by itself will move the markets.

All in, and barring some now unforeseen financial or geopolitical shock, we do not expect either large or frequent changes in Fed policy over the next several months. We will continue to manage our portfolios with that thought in mind and if changes in course become necessary, we will make those adjustments. And if you are a fan of The Who but haven’t heard “Won’t Get Fooled Again” recently, give it a listen; unlike me, it has aged remarkably well.

Jim Stuart, Vice President & Portfolio Manager

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