Feeling Comfortable? This Slow Burning Issue Could Change Your Mind

If you’d offered the current state of the financial markets to most investors 18 months ago, most would have snapped your arm off. The events relating to Covid-19 were unprecedented, and so were many policy resolutions drawn up to tackle it. Doing something for the first time is to be rewarded but being adventurous in 2020 was a high-stakes game with the fate of the global economy firmly in play.

Major equity indices have recovered and pushed on to print new all-time highs. The currency markets have made necessary adjustments gradually rather than dramatically, and gold, one traditional barometer of risk, is passively moving into the end of a sideways wedge pattern.

Gold Price Chart – Weekly Candles 2020 – 2021

Source: IG

The benign mood has ironically created a situation where some quarters of the investment community are willing to shake things up. The incumbent Chair of the US Federal Reserve, Jerome Powell, is up for re-appointment in 2022, and calls are growing for US President Joe Biden to make a change.

Fed Chair – Runners & Riders

Fed Governor Lael Brainard is one name already being touted as an alternative to head up the Fed. Brainard has been fine-tuning her policy approach, possibly with the top job in mind. She is seen as a ‘left-wing progressive’.  Her outspoken opposition to Trump-Powell deregulation of the financial markets will have earned her some brownie points with the Biden administration.

Atlanta Fed President Raphael Bostic could become the first Black Fed Chair. His focus on grassroots economic fundamentals chimes well with the Democrat party, but his recent hawkish comments on interest rate levels could count against him.

The odds are that Powell will stay in position, but in any race with a limited field, the eventual outcome can often be a close-run thing. Biden’s low popularity ratings could also increase the likelihood of a Hail Mary style surprise shake-up. With the President’s key fiscal policy initiatives held up by Washington horse-trading, having a friendlier face in charge of the Fed offers him a chance to introduce looser economic policies on two fronts.

Next Steps

Whatever the merits of the different candidates, the question for the markets is how much does this change in risk appetite reflect the arch-enemy of all investors, hubris? If continuity and ‘a safe pair of hands’ is the priority, retaining Powell is the obvious choice.

It’s a slow burner, and nominees have to be approved by the Senate Committee on Banking, making the exact timeline hard to call. However, it’s likely to become an increasingly contentious topic. That alone will add to market volatility, just as things are appearing to be settling down.

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About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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