Janet Yellen is set to be replaced by Jerome Powell as Chair of the US Federal Reserve. Whilst markets have speculated what the new kid on the block will deliver, the outcome is evolution, not revolution. Powell was not the preferred candidate of those who thought that interest rates should be materially higher; rather Powell is born in the image of Yellen, who gently allowed short rates to edge higher over her four-year term.
But just as significant is the change down the Federal Open Market Committee’s (FOMC) pecking order. The FOMC’s vice chair Stanley Fischer is gone, as will be William Dudley – the New York Fed rates ‘hawk’ who announced early retirement for mid-2018. There are further rotations to the rates-setting committee in 2018, which will see the dovish Neel Kashkari exit to be replaced by the more hawkish John Williams.
So what does this all mean? A change in members creates further uncertainty as people’s pronouncements tend to differ when they are ‘in the job’ i.e. on the FOMC. But more importantly, markets will be keen to see what ‘mettle’ Powell brings to his new role. Markets will want to understand what the FOMC looks like and testing its mettle is likely to be on the agenda. Expect to see an increase in volatility, especially in the front-end of the $ market. However, this is most likely at a disappointing rate compared to the choppier days of Greenspan and Volcker.